A number of people have asked me to expand on a subject I wrote about in my piece “7 Things I Learned from Failing That You Can Avoid” regarding startup founder equity split. It’s important for me to address this correctly because it is such a sensitive issue depending on your role at a pre-money startup. For reference, here’s what I wrote:
When it does come time to put something down on paper for equity share (you had better at least have an MVP), split it even. It was my idea, it was my money being spent, it was my contacts, it was my experience, it was my design and marketing, and it was my team. Despite all of that, I couldn’t have built the product without my cofounders.
Unfortunately, I spent too much time justifying my contributions and not enough time considering how that affected my team. Assuming you’ve built your team right, you each share a significant amount of responsibility and complement one another’s skills. If you’re pre-money, look at the people around you and ask yourself if you can get to where you need to be without them. If you can’t, split the unicorns and rainbows evenly.
To be honest, I expected a far greater opposition to my stance on this issue. It was quite refreshing to see so many founders, cofounders, and aspiring entrepreneurs get behind me on this one. You see, I was measuring my contributions in my role as “Founder and CEO” wrong – I put more weight with the things that were important to ME. In this case my excuse for the lump of equity I controlled was justified by being the “guy with the idea”, the “guy with the money”, the “guy who knows the industry”, the “guy who is going to design and market the site”, the “guy with all the contacts”, and the “guy who pulled the team together”. You might say that I was right, I did deserve the most equity – a year ago I would have delightfully agreed with you too. However, a year ago I had no idea what kind of damage it was doing to our startup and the team. Would this have saved our startup from failure? Probably not, but I can assure you it might have made the inevitable journey there more enjoyable.
It really just comes down to greed. It’s as simple as that, we’re inherently greedy and over protective of what we feel is ours. The reality of the situation though is unless you’re a one-man machine that can build the entire business to revenue/investment (no not bootstrapped investment or friends and family money), you will need cofounders – you will need to build a team of scrappy people who’s skills compliment your expertise. The good news is that the spread of responsibility greatly increases your chances of success! Instead of one dude doing a thousand things good, you’ve got three dudes (or chicks, respectively) doing their own things great. Startup godfathers tend to agree that the rule of three also applies to founding teams, keep this in mind when thinking through who you need and why you need them.
Most people at this point would cheer me on, agree with what I have said, and set out to change the world with a new perspective on equity distribution among startup founding teams. However, there are still quite a few that are left with the question “What if I do all of the work getting an MVP to market, get the customers, and develop the brand?”. My response would probably be “If that’s the case, why exactly are you deciding to add cofounders now?”. If the reply, regardless of what it is, starts with “Because I need…” – split the equity even. What I’m trying to say is that if you’re pre-money (ie. seed, series, revenue) and you need additional people to help you get to the green, you should split the equity down the middle. Ask yourself if you can get to where you want to be without the people/roles you’ve identified as being necessary for getting you there.
I know it’s controversial and I know most of us today are raised to be deserving and entitled. Some businesses can be built to revenue without having to add cofounders and some can’t. For the ladder, you need to take a serious look at yourself and find out what your motive for hoarding equity really is.
Have a question? Disagree? Want to exchange pleasentries? Leave a comment below. As always, you can reach me on Twitter @joshuahays or by emailing me at firstname.lastname@example.org