Here’s How to Split Equity With Your Cofounders

Startup Founder Equity SplitA 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 hello@joshuahays.com

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4 thoughts on “Here’s How to Split Equity With Your Cofounders

  1. Hi Joshua, great piece! However, I still think that as a founder and “the guy behind the idea”, it is important that your contribution is split accordingly to the commitment to the company. It is true, that if you just can’t do something without your co-founders it makes sense that you both share an even amount of equity. However, I think this requires a quite unique formula in your team: all cofounders must share the same level of commitment.
    Let’s take my example, in my case, I am devoting “full time” to my startup, as my cofounders are only doing it part-time. With one of them, the level of commitment is the same. Even though we are not devoting the same amount of hours, we both work hard to make the deadlines. I really consider that today, the project is his as it is mine.
    My other partner does a great job too. But due to his personal circumstances, he cannot devote as much effort to the company right now. This is a very common issue in startups, and despite the fact that we need him, his contribution cannot be measured only on that, but on his level of commitment.
    We are 45/30/25 now and it works good for us. But I find it that having a smaller equity is discouraging for some cofounders and eventually they end up doing what they think their equity deserves.
    It is a complex issue, and your post illustrates a great way to tackle it. I would just like to add that equity could also be distributed according to commitment which is not necessarily even.

  2. @rafaec – Thanks for reading! I think there could be further expansion on the subject matter, certainly including scenarios like what you’ve just described – time commitments. However, I have a hard time defining equity for something as granular as time. For example, I had to commit more time to the project early on to build the team, create the brand, plan the project, and stay in contact with potential investors. However, there were times where my two cofounders were knee deep in code and I was enjoying a favorite TV show at home. The point is, if your cofounder isn’t meeting your expectations, they should be let go. But, if they are meeting your expectations (not defined by time), what does it matter? That’s like saying if two guys have the same exact job but the other does it just a tiny bit quicker – he should be paid less.

    But by all means, if your set up is working now and you’re absolutely sure of it, do not make a change. This applies to early stage startups or struggling founding teams. Hope this helps!

  3. Pingback: Recommended Reading for Marketers – Week of 11/12/12 – 11/16/12 | Joshua Hays

  4. Pingback: Founders, co-founders and ideas – The true potential | The Road to iO

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