- Deciding how, and when, to split equity with your co-founder(s) is a fundamental part of the early stages of setting up a company.
- Many factors should be taken into consideration when deciding on the equity split amongst the founding team.
Structuring your founding team and laying the foundations of your startup are arguably far more important decisions than those about product, market or finance. Even the best ideas can fail if the founding team does not adequately address factors such as roles and compensation.
One key factor that needs to be addressed is the equity split amongst Founders.
There is conflicting information about how to do this in a fair, efficacious way.
Even or uneven
Some, such as Y Combinator, recommend splitting equity equally amongst co-founders. Others believe that the fair outcome is an uneven split determined by factors such as technical contribution, ideation, financial contribution and more.
Immediately or delayed
Likewise, there is disagreement regarding whether decisions about equity split should be decided upon immediately or delayed until performance, past, present & future contributions and personal preferences have become more clear.
Many believe that quickly jumping into the decision of splitting equity equally is also a sign that Founders do not have the maturity to have the hard conversations and difficult dialogue that will prove paramount at various stages of the company’s journey.
Ultimately however, the degree to which you split equity amongst Co-Founders will be unique to your circumstance and determined by a number of variables.
Who had the original idea and comes up with the most features? It's worth noting here that just because it was your idea doesn’t mean you deserve 90 percent of the equity. Ultimately the value of a startup is determined by execution and tangible results. The idea is only a small part of the equation.
Who is spending/contributing the most in regards to building the product technically?
Commitment & Risk
Who is committing the most amount of time? Do some of the founding team treat the startup as a full time commitment whilst others view it as a part time hustle? Founders who are committed and join the company full time are more valuable than those who support from afar. Moreover, the opportunity cost of sacrificing a career to pursue the startup should not be underestimated. Consider the past, current and future contributions of the Founders.
Who is committing the most amount of capital?
Experience, expertise and network
What is everyone bringing to the table? Who has the most amount of previous experience running/building a startup? To what degree do you or your Co-Founder(s) have meaningful experience or expertise in your startup’s space? Are some skills more valuable in the context of your startup than others? Knowing the industry and possessing an extensive network can greatly improve the company’s probability of success.
If your company has yet to be incorporated and thus not in possession of IP, who is responsible for the work that is, or might be, patented, trademarked or copyrighted?
However you decide to split equity, it is sensible to ensure that equity vests over a period of time (at least two years) and that it clearly states in your Founders Service Agreement what happens if a Founder should quit or leave the company for another reason.
These sorts of considerations can be emotionally charged, complex and long-lasting. Conversations around equity have the potential of being triggering so take your time and don’t hesitate to seek out legal advice if you feel the need to.
Also remember that allocated equity will be diluted as your startup grows and capital from investors is received through fundraising rounds.
Various formulas and calculators are available to help you determine the equity split amongst Founders, for example the ‘Startup Equity Calculator’.
“Equal split works best. In other cases you'll be asked why one founder has more equity than the other(s) and you'll need a good answer to that question.”
“I like the answer from the “Founder Dilemma” book, where it is argued that founders who discuss carefully about their equity stake tend to be positively correlated with success. This basically means that founders who are good at bargaining are probably more successful.”
- Ryan Brodie, Founder
“Equity equation is always their upside vs downside: what's their risk and reward compared to yours? Never give straight equity to non-investors, always restrict stock, whatever the amount.”
If you’ve spotted any inaccuracies in this post, please let us know. We want to make sure we are offering the most update to date and accurate information. Feedback is always welcome.