How to split equity between co-founders
Dividing equity among co-founders can be one of the toughest challenges a startup team can face in the beginning. How much equity does the person who came up with the idea get? How much does the technical co-founder get? We're going to cover all sorts of these equity questions in this blog post.
Before we get started - there's no exact science to splitting equity between co-founders so please don't expect an exact formula to come out of this. We're just going to go over some guidelines when it comes to splitting equity between co-founders.
What's normal when it comes to splitting equity between co-founders
According this this research from the Harvard Business School, "35% of all teams split the equity equally among all founders; 67% of all teams make that decision at the outset of the venture, and 42% of all teams decide on their equity split within a day or less". Now, one footnote to this research from the Harvard Business School - it's from 2012.
Even though this data is a bit older, I would bet that this data is probably pretty similar to what's happening today. Heck, it might even be worse.
Now, the first two data points that I brought up from this study didn't scare me right away. What did scare me right away was the last point: 42% of teams decide on their equity within a day or less??
That's terrifying. That means equity is being split between co-founders in some little meeting that the co-founders aren't taking seriously. They're most likely going "here's what we're doing to do" and everyone just nods their head even though there's a TON to talk about. Things like a vesting schedule, roles in the company, why equity is being split the way it is, what to do if investors get involved, and all sorts of other things! Yet, if you're making this decision in less than a day, you're missing so many important co-founder conversations that can haunt your startup years down the line.
Set expectations out of the gate
To get the process of splitting equity started the right way, we recommend using Dave Parker's two meeting process. It's a great framework for this splitting equity process and taking care of a lot of potential co-founder issues that can arise in a startup.
This process asks questions that help to set expectations between you and your co-founders. Questions like "When are work hours?" or "Why do you want to be a part of this?" are key questions to be asking your co-founders. If you don't know the personal reasons why a co-founder is in this startup, that can lead to disaster later on. Especially when it comes to big decisions for raising money, hiring, or overall direction of the venture.
Using Parker's two meeting structure gives everyone multiple points to air these personal reasons out and really quash any major co-founder conflicts that may arise. It's so much better for issues to arise in these two meetings than later on down the road when decisions are much more costly.
Use the first meeting to discuss set expectations and get to know each other personally, do the homework assignments of reflecting and the equity calculators, and then come back to one another to solve equity.
If you use Dave's process, the chances of your team feeling more together are quite a bit higher too as you'll know what each other are expecting and wanting out of this startup journey.
Someone Take the Lead
As Dave mentions in his introduction, the only wrong decision is going 50/50. I would tend to agree with that.
For a startup to be successful, someone has to take the lead. Group decisions are too slow and can cause way too much chaos.
If it's helpful, think about it this way. The United States government has three branches. An executive branch to make decisions quick, the legislative branch to make bigger, but slower decisions, and the judicial branch to keep things in check and ensure what's being decided is staying true. Typically, the executive branch lays out the vision for the government, the legislative branch may follow to an extent, and the judicial branch makes sure that that vision upholds the tenants of the United States government.
If you have two other co-founders, you can think of your startup structure in very similar ways. Who is laying out the vision? Who's making the decisions of how you operate that vision? And Who's pushing the boundaries of all of these decisions? It's not exact science, but it's similar.
Now, there are a lot more legal decisions to be made when it comes to startup equity. We're not covering these decisions in this post because let's face it, it's a worth an entirely new post. We just wanted to cover how to split equity between co-founders in this post, not the legalese. However, as you move this process forward, make sure to know about vesting schedules, cliffs, and some of the other nuances when it comes to equity. It can help ease some worried minds about the long term and help in these discussions if you've never heard of them.
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