Splitting equity between co-founders can often be an elephant in the room. It is one of the most important decisions you have to make as a founder. Whose idea was it? Who will be CEO? Do you split it equally? Who is working full time on the venture, should their equity be higher than the co-founder who is not involved in the day-to-day operations?
First word of advice: do not base your equity split on the business idea or on early work
It is going to take a significant length of time to build your business to a stage where a successful exit is on the table. That first year of early work completed by Founder A is going to become irrelevant by year 8 and is likely to draw out some resentment from Founder B. Whilst some weight should be given to the co-founder who came up with the business idea, ultimately your startup is not going to succeed purely based on the quality of an idea, it is all in the execution. So ownership of the idea should never be a primary decision factor.
Focus on who is making actual contributions
Who is working full time on the business and who is biding their time before handing notice to their ‘real job’? In the early stages, you really want to reward ‘sweat equity’. Logically, equity should be allocated based on who has put in the most work and will continue to do so going forward. Take a look at the person who has taken the risk of leaving their 9-5 job for the venture. That risk alone should be rewarded far more than the co-founder waiting for the business to take off before giving it their all.
Division of roles, each founder’s experience and their impact on the business
Ideally your co-founder/s will have skills that complement your own. Who will be CEO? Who will be responsible for marketing and sales? If a certain founder left, would it affect your chances of raising funding/launching/generating revenue? Weighing all these questions up can be hugely beneficial to negotiations. This can get personal, and it can be wise to bring in a mediator for this discussion.
Investors want a balanced and valued team
Another factor to bear in mind is that investors will look at the founder equity split to get a feel for how each co-founder is valued in the business. It can be an indicator of who is most active, who has most impact and who will drive the business success. So in that vein, a lot can be communicated in equity split.. Make sure it gives the right message and be prepared to explain your reasoning. If an investor does not have faith in the quality of your team or how they have been incentivised, it could be a mark against you and a reason not to invest. A great, valued team can turn out to be a crucial mitigating factor for the setbacks a growing business is bound to encounter.
Vesting shares
It is also strongly recommended that you vest all founder shares. This would mean that each founder has to earn their equity stake by remaining involved in the business for a set amount of time or by achieving pre-defined milestones. For example, a co-founder could technically own 40% of the business, but if they quit or get fired within a predetermined amount of time (often the first twelve months), they would walk away with nothing. After the one-year mark, the co-founder would earn 25% of their stock and continue to receive more of their stock typically over a four-year period. Vesting protects founders from each other and aligns incentives ensuring everybody works towards a common goal: building a successful company.
Use the tools available to you
At the end of the day, there is no cookie-cutter way of splitting equity. Some would argue that splitting equity equally is the wrong approach as it is a red flag to investors that the founders are naive to think their contributions will be equal. Others would argue that if you are not willing to give your co-founder close to equal, you are looking at the wrong partner.
Make use of tools available to you, such as the startup equity split calculator on foundrs.comwhich takes you through a questionnaire and can be a great starting point for discussions. Try out slicingpie.com, a one-size-fits-all model that creates perfectly fair equity splits for bootstrapped startups.
