Founders frequently ask me to provide guidance on how their startup should split equity between co-founders. My answer is always: (1) It Depends, and (2) Quickly.
(1) IT DEPENDS
If you’ve ever hired a lawyer, you will (unfortunately) hear the phrase “it depends” several times. In this situation, the “it depends” hinges on the respective past/current and future contributions of the founders:
- The Idea
- Business Plan
- Intellectual Property
- Cash (Consider structuring this separately from the founder split.)
- Opportunity Cost (i.e., Is one founder making a larger sacrifice?)
- Industry Expertise
After taking the above items into consideration, a startup team will rarely end up with an equal split. And for what it’s worth, a startup team should rarely end up with an equal split. On the other hand, I don’t recommend the startup team create a complex methodology to come up with the solution. Save the fanciness for the code.
Rather than pushing forward with development & implementation, co-founders run the risk of spending too much time on the equity-split decision. In addition to multiple startup-wide meetings and emails about the split, the individual co-founders will spend time wrangling with the matter as well. However, it’s not going to “kill” the startup if this decision takes a bit of time.
The main reason to have this determination done very quickly is that the startup team gets to have — and conclude — its first difficult conversation. There’s no avoiding difficult conversations at a startup. Don’t start with the first one.
Regardless of how you decide to split the intial equity pie, seriously consider vesting your founders shares.