I am fortunate to work with many talented and energetic founders through Codeventures and iScripts. Most of them are well informed about the industry, product, and customers. But the basic starting up part seems challenging.
One of the topics that keep coming is splitting the equity among the founders. Many companies with great potential die on the vine because the splitting of equity is not done properly. Many times they can’t move beyond their initial discussion about equity split. Even if a co-founder agrees to a particular split now, it doesn’t mean they would see it that way later.
If you are trying split equity among co-founders
- Be fair
- Be equitable
- Be upfront
Please remember 100% of nothing is still nothing.
I will try to tell you how to think about an equity split. I can tell you few guidelines that worked for me and others in the past.
There are many tools to help you with equity split among co-founders
I am a fan of Slicing Pie and Mike Moyer. It’s an excellent method to keep the share equitable. But it needs some effort from the side of founders on an ongoing basis.
So it would require a strong CEO candidate and may lead to unpleasant conversations regularly.
Other options are normal option grants. We created a co-founder equity calculator as a guideline. It looks at your monetary and effort combinations.
It also takes into consideration some of the co-founders might be taking some salary and others may not.
The opportunity cost for different co-founders may be different. So considers that as well.
Here are some of the items to avoid
Once you agree on the equity split, avoid doing the equity grant and vesting immediately.
When you start, everybody is very enthusiastic.
But things may look different after 2-3 months. So it beneficial to have equity vesting over a period between, say, 2-5 years. Also useful to have a cliff for equity.
If a founder leaves before the cliff period, they will abandon their equity portion. The typical cliff period is six months to 2 years. That will avoid having founders who left the startup but holding a significant chunk of equity.
It is tough to put a valuation for the company before getting professional funding. Everybody will have differing opinions, and there is no value in having that discussion. So leave valuation out of the equity split discussions.
There are several concerns that co-founders tend to have about splitting equity amongst themselves.
However, splitting equity will only do good for your company -especially if you are running a startup organization. Just be fair and equitable as much as possible. If you feel you are stuck contact a neutral third party that you trust and respect. They may see things differently when they look from the outside.
If you need to check each founder’s equity shares based on your input, you can use our startup equity calculator.