How to Split the Startup Founder Equity Pie

By Incorporation

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:

Past/Current Contributions:
– The Idea
– Business Plan
– Intellectual Property
– Cash (Consider structuring this separately from the founder split.)

Future Contributions:
– Time
– 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.

(2) QUICKLY

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.


ACCELERATE YOUR STARTUP LAW KNOWLEDGE!

Startup Law doesn’t have to be a confusing maze. The practical knowledge in "Acceleration: What All Entrepreneurs Must Know About Startup Law" will help you make the smart decisions to protect your startup and its future. Available in ebook and hardcover.

Buy the Book on Amazon
startup-lawyer-acceleration-cover

Tagged under: