How to split equity fairly between founders?

How to split equity fairly between founders?

Question

I'm looking for a good way to to share equity between a co-founder and myself. Any advise on tools, websites or just personal experience are really appreciated. So I've been working on a startup that helps people find homes to buy. About three years ago I met a software engineer who's been a tremendous help ever since. I gave him some vesting equity (15%) in the company and a low salary which I paid for myself as we didn't make any profit yet. As he did a great job I offered him to increase his equity to 20% of the company, of which he replied he would like it to be more in the range of 49%. IssueI have the feeling that what he's asking for is a lot, but truth be told he has done most of the (technical) work so far. I brought in some cash and a did some marketing stuff to get us 20'000 users on instagram. I want to share the equity fairly between us but I don't know the proper way to do it. If you have any good ideas on how to share equity, I would be really thankful!


Top Answer

It’s easy to think of equity as being valuable in and of itself, but that’s not exactly true. Equity is a claim on future profits.

This means that if your company does well, considering the risk, you’ll have a larger share of the pie than you would have otherwise. But if the company does poorly, then having more equity won’t help anybody much at all. More Risk = More Rewards.

I know that the last thing you want to think about when your business has millions of other problems to solve is splitting equity between co-founders. And this person does seem to sound like a co-founder, considering that he did most of the technical work and you brought the cash. CTOs equity is a topic we already discussed. Nonetheless, I think 45% is too much, considering that you were the one taking all the risks. I would probably suggest sticking to the 25% and offering him a vesting schedule for some more stock options over the next few years.

It also depends on what kind of salary were you paying him and how much value the current 15% equity has. It’s normal to pay less than market rates at the beginning – that’s exactly why there is additional equity, but if he’s getting a salary then he shouldn’t expect too much of equity.

Quick math for equity distribution related to the salary:

  • If the person is getting proper salary — just a normal employee. 1% Equity if they prove that they’re highly interested in staying with the business long-term.
  • If the person is getting lower than market rates — 1-10% and possibly adding to the management board depending on how much of a hit on their salary they take. Their salary opportunity cost IS their investment in the business.
  • If the person is getting zero salary — 10-50% This is co-founder level.

Another question you might consider: how replaceable is he? If the person is highly valuable to the organization, then it will be difficult for you to negotiate, but he will also be interested in the project continuing. If the person is replaceable, it may be easier for you to get what you want out of the situation. However, you may have to give a little more to make sure that he leaves on a good note and isn’t just looking to get under your skin.

One more point to consider — tying their equity to performance. This will ensure that they’re performing at a high level and are working hard for your company’s success. Finally, adding a vesting schedule on top of all of this ensures that they stick with you for the long haul and continue working hard towards making your company successful. Win-Win basically 🙂

Shouldn’t I get more shares because I came up with the idea? No. Ideas are pretty much worthless. You don’t get paid for your idea. Ideas aren’t worth much unless you do something with them. Working on the company is what brings value, not thinking up some crazy startup idea while lying on the couch.

Tools to calculate equity:

https://www.embroker.com/blog/startup-equity-calculator/

https://cofounders.gust.com/

https://gist.github.com/hrishimittal/9adcfe04eda1e847515a

I value the startup community because we are all in this together, we're all amateurs trying our best to build something meaningful. Share your unfiltered experiences and thoughts with others, one mans rant is another mans valuable lesson.


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