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EquityZen's Blog On Startups and Their Economics

Young Startup Edition: How Should You Split Equity Among Co-Founders?

Atish Davda | September 29, 2014


Here at EquityZen, we focus on proven, mature startups. Some of our readers are entrepreneurs who are building the proven startups of tomorrow. For topics of particular interest to those readers, we have started adding pieces under a new column, Young Startup Edition.

Split the pie in a way you grow the pie.
So you're considering (or advising others on the subject of): how should founders split equity amongst themselves? This question gets especially hairy when various founders come to the table at different times, or with chips in different currencies.

In addition to everything below, don't forget to consider dilution from outside investors (if relevant to your business). We've purposely stayed away from numbers below as each situation is different, but numbers are what you want, bookmark this handy calculator to help you determine what each founder will own after accounting for dilution through Series A.

Here's what you need to remember...



Execution
Start-ups are as good as their execution. I am certainly not the first to say: building a successful business (i.e. making the equity worth anything greater than $0), is all about execution. So, while credit for the idea may go to one of you, where would the business go without the team?

Factors to Consider
There are tangibles and intangibles to consider. The list is not exhaustive, but captures the gist of the decision-making process:
* Relevant expertise: Does one of you bring vital credibility to the business?
* Relative expertise: What is marginal benefit of skills of person X assuming you already have ABC on board? Note: I admit the use of "skills" is rather crude, as below factors contribute to "skills."
* Expectations: For what tasks will everyone be accountable? Will everyone take the same salary, eat the same ramen, and work the same hours? See below for a nuanced set of expectations.
* Chemistry/Motivation: Why and for how long is everyone committed to the business? Is everyone aligned on the reason / time horizon?
* Sum of Parts: Is the team as a whole better off than any subset alone?

Bottom Line
To put it dryly, you're running an optimization process: at what level of equity, would you be better off having person X on the team, given the team is currently composed of ABC?

Communicate Expectations
Consider and communicate expectations. What will be expected of each? Who will keep the ship steering on course when someone falls short of expectations or steps into someone else's territory? Be sure to discuss this in context of each of these phases of the business cycle: steady state, good times, and (most importantly) bad times.

Seriously, Communicate Expectations
Communicate openly and frequently. It should come as no surprise, but if your co-founders are astute, they are running their own (similar) optimization process. Therefore, that everyone is aware of, and agrees on, the process is of paramount importance. Trying to "game theory" this decision or using negotiation tactics may end up costing all of you.
Dues aren't paid, past tense. Dues get paid each and every day.
I was exposed to this statement recently and it has stuck with me. I find it to be a good reminder to put things in perspective when times get tough, and you feel you have to "earn" your equity in the company. So, make sure everyone buys in to whatever equity breakdown upon which you all agree.

There is a lot of material on the subject, so if you're still in hungry for more, check out: Entrepreneur, Forbes, AlleyWatch,  and even this interesting calculator for helping you arrive at the split.

Have I missed other factors to consider? Let me know by commenting below.

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