Splitting Equity With Co-Founders, A Guide
'If you can't have the hard conversation around how to split equity, you shouldn't be starting a company with someone.'
Early on in my career, I received the advice: 'If you can't have the hard conversation around how to split equity, you shouldn't be starting a company with someone.' Splitting equity among co-founders is a tricky balancing act. Often, the person with the idea believes they should be compensated heavily for the great concept they’ve arrived upon. But companies are long, tough endeavors where lack of execution and lack of focus tend to kill more companies than not.
Following a few steps may help you better allocate equity in a way that benefits the company for the long haul.
Define roles and responsibilities: Before determining the equity split, it is important to clearly define the roles and responsibilities of each co-founder. This is much less about who gets the “C-Suite” titles, and more about what will each founder spend their days doing to drive incremental change in the business. Having this discussion will help to ensure that each person is contributing and not duplicating efforts.
Consider the value of each contribution: Think about the unique value that each co-founder brings to the table. This could include things like expertise, experience, connections, and financial investment. Weight those based on how important you and your co-founder(s) believe they are to your success. If you’re going into a heavily relationship driven business and one co-founder has more relationships, that may weigh more than a co-founder with a technical background and vice versa.
Use a calculator or formula: There are various online calculators and formulas that can be used to determine an appropriate equity split. Some popular methods include the "Three Founders" formula, which splits equity evenly among the first three founders, and the "Vesting Schedule" method, which allocates equity based on time worked. I’m personally a fan of weighing the risks and compensating co-founders for their ability to tackle those risks (see below for an example).
Negotiate and compromise: Once you have a rough idea of the equity split, it's time to negotiate and compromise with your co-founder. Be open to discussing your reasoning and be willing to make adjustments as needed.
Get it in writing: Once you have agreed upon an equity split, it's important to document it in a legal agreement. This will ensure that the terms are clearly defined and can be referenced in the future.
It's important to remember that the equity split may not (and likely should not) be equal, and that's ok. The key is to make sure that the split is fair and equitable based on the contributions and value that each co-founder brings to the table. With open communication, compromise and proper documentation, you can ensure that your equity split is fair and will set the foundation for a successful business partnership.
