At some point, your best associate is going to ask the question: 'What's my path to partner?' If you don't have a clear answer, you'll lose them — or worse, you'll make something up on the spot that you'll regret for a decade.
Why most equity structures fail
Most small firm equity structures are designed in a panic. Someone threatens to leave, so the founding partner offers a slice of ownership without thinking through what that means for governance, compensation, or exit.
The result is usually one of three disasters:
- A partner who owns equity but has no real authority
- A compensation structure that rewards tenure instead of contribution
- An exit provision so vague that everyone's afraid to trigger it
The three models
Equal split
Simple but rarely fair. Works when partners contribute equally across origination, management, and production. Falls apart as soon as one partner starts outperforming.
Eat what you kill
Pure origination credit. Rewards rainmakers, punishes grinders. Creates a firm that's really just a cost-sharing arrangement between solo practitioners.
Weighted contribution
Allocates equity or profit-sharing across multiple dimensions: origination, production, management, and mentorship. More complex to administer but most aligned with long-term firm health.
The right equity structure isn't the simplest one. It's the one that rewards the behavior you actually want.
What to define upfront
- Vesting schedule — don't give equity on day one
- Valuation method — how will the firm be valued at buy-in and buy-out?
- Decision rights — what requires unanimous consent vs. majority?
- Exit terms — what happens when a partner leaves, retires, or dies?
- Non-compete scope — geographic and temporal boundaries
Get these in writing before the handshake. The conversation is never easier than it is right now.