How to split founder equity for your startup

Today’s question does not have a single right answer.

There are a lot of ways to make this work, and there are some guaranteed ways that will not work. I’m going to share how I did it, how I’ve seen this fail, and I’m going to share some advice from a friend, who is more recognized as a nationally renowned expert on the subject than he is for being Brad's friend.

Let’s talk about how to split cofounder equity.

First, Founder vs. Cofounder

I see a lot “founders” out there who have “cofounders” building with them.?Many bloggers?and “experts” will tell you the founder is identified as the ideator, and the cofounders are the team that came in to support the idea. That is fine. I was the idea behind GoWild, and I have never labeled myself the “founder” because I didn’t want the perception that the idea alone mattered more than the execution.

Ideas alone aren’t worth a?damn?thing.

We are all cofounders because this thing was co-built. We depended on each other through it all.

However, that doesn’t mean the idea doesn’t have some weight in equity. And it doesn’t mean cofounder equity should be the same.

Equity Equality vs. Cofounder Pie

I’m not an attorney. Before giving my thoughts on founder equity, which can quickly become a legal matter, I turned to my friend,?David Willbrand, to ask him for some advice to share.

In addition to being a must-follow on LinkedIn, he has been a professor of law for multiple universities,?is a published author?on the topic of funding and growing a startup, and is currently serving as the Chief Legal Officer for?Pacaso?and Professor of Law at the University of Michigan.

In short, David is a G.

He was quick to point out the contradicting opinions on how to split—or not split—founder equity. For example, the famed Y-Combinator recommends?splitting founder share equally, but David and I both agree this is a bit too simplified for the long run. Alternatively, YC does make a great point of not being too short sighted in what a founder’s contributions will be. It’s not all short term.

My cofounder?Zack Grimes?is a great example of this. Zack came onboard to be our Cofounder, Chief Analytics Officer. In other words, he was the data guy who was going to build the algorithm for?GoWild. Zack’s role was slow coming at first, as he was finishing up grad school at Northwestern. Two years in, though, I asked Zack to become our President. He began leading legal relationships, managing finances in our day-to-day, managing our engineering team, and more.

At that time, we realized Zack deserved something for his new contributions. The cofounders all voted and the board agreed to give Zack a new allotment of equity options.

This example comes around to what my take is, which David backed up when I spoke to him about this.

In short, you need to just get moving, and you can make adjustments as you go.

“Let your company breathe a bit in the preformation stage,” David said. “Admittedly, this can be dangerous, and runs against a lot of advice you’ll hear elsewhere because it can let incongruent assumptions fester that then just explode when pen is finally put to paper. That’s fair, but it’s wayyy easier to make adjustments when things are loose (and you will make adjustments).

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“Once concrete legal documents are in place, making changes is an expensive pain,” he continued. “So just get started as founders and see who hangs in there, who bails, and who joins. Look at the relative contributions, and often the appropriate equity allocations emerge organically. Then it’s time to memorialize. You’ll know it when you see it.”

Keep in mind, David is not talking about doing this for years.

It could be mere months.?

I think being transparent about this process is critical. Our cofounders worked together for months before creating an operating agreement, and even then, I later found out the operating agreement template I used was garbage, so we redid it in two more months with the help of an actual attorney.

To vest is best

David stressed one other critical point—the joining parties have to be subject to vesting so at least you can clawback equity from those who don’t live up to expectations. I completely agree—I have mentored so many founders who lost a cofounder because they found a new girlfriend, found religion, drugs or both, or just turned out to be a psycho. It leads to horrible divorces, and yes, a founder divorce can be every bit as ugly as deciding who little Jimmy spends the weekend with.

For more advice on vesting, just read?“Venture Deals.” This will not be the last time I reference this book on this blog—it’s the startup founder bible for deals. David also covers it in his book “Seed Deals,” which you can think of as the prequel to Venture Deals.

OK, but how much per person?

If you are the ideator sorting through this, one thing to keep in mind is the value of having someone who is ultimately responsible. Sure, it feels nice to have everyone bought in for equal value and seems like the respectful thing to do for your cofounders. But what happens when it goes south? If this is your first company together with these potential cofounders, avoid a legal disaster and keep a majority stake in your favor—you never know how things will shake out.

Seasoned investor and professor,?Frank Demmler, has become known in niche circles for creating the recipe Cofounder’s Pie. I used Frank’s recipe to get a feel for what the workload balance was going to be for our cofounders, and I have to admit, it was a powerful tool. When founding GoWild, I found a Google sheet template for Frank’s philosophy.?Here is a link to my updated version.

Frank’s recipe for Cofounder’s Pie creates a weighted scale, identifying not only the roles and responsibilities, but the importance of each role. He breaks this out across five factors:

1) Idea

There is no company without the idea, but the idea is also worthless without execution.

2) Business Plan Preparation

You could also think through this as the business model design. Of course, a startup’s model will likely change over time (we’ve pivoted a few times). Those early days, though, are incredibly difficult and time consuming. As Frank notes, pulling together and organizing all the thoughts of the founding team, filling in the blanks, identifying and reconciling the differences, and producing a document that captures the essence of the business and helps persuade banks, investors, board members, and others to support the company is a Texas-sized undertaking.

3) Domain Expertise

This accounts for knowing the industry, as well as the necessary skill sets to build the product.

4) Commitment and Risk

Frank has a great quote to describe risk: “A chicken is involved with breakfast, but a pig is committed.” Cofounders who are all-in are more committed (the pig) than someone who is sidelining (the chicken). Likewise, financial investment cannot be overlooked.

5) Responsibilities

Who is handling what? It’s unlikely an even split.

Consider the Relative Importance of the Elements

This part is critical, and Frank’s copy is too good to paraphrase. Straight from?his blog:

“For each company, the relative importance of these elements is likely to be very different than that for another company. A company based upon new technology is highly dependent upon the “idea.” On the other hand, a new restaurant is not likely to be so unique that the “idea” is a major contributor to the restaurant’s ultimate success. If we were to evaluate the ideas on a scale of 0-to-10, the technology company’s idea might be a 7 or 8, while the restaurant may be only 2 or 3.

Similarly, the relative importance of the business plan will vary. A company that has to raise external financing will need a plan that will assist fund raising efforts. If the founders are providing the startup capital, then the plan will be relatively less important.”

Relative Contributions of the Founders

Once you have designed your Cofounder Pie’s ingredients, go through and list out your cofounders, and evaluate who will contribute to what row. This factors the idea, business model, industry connections, etc.

Making the decision

The right answer to splitting your equity is going to be a mix of looking at Cofounder Pie, as well as what sits well. I agree with YC that a large weighted shift in the ideator’s favor is not going to sit well with the other contributors—and it’s just not fair. That’s where Frank’s recipe fairly highlights what the workload is going to be.

Once you work through your own Cofounder’s Pie recipe, think through the next steps. If it’s a split of 27%, 33%, 40%, with the final 40% falling on the ideator, I would say go 30, 30, 40. This keeps control with the original founder in case you end up with someone failing to contribute (again—vesting!), and gives plenty of worthwhile upside for the other founders. Keep in mind that you can always open an option pool and allocate more equity to cofounders.

I ended up having the best cofounders I could have imagined—and they have all received more equity over time because they’ve proven to be worth it. The truth for many founders, though, is that people will come and go. Some will be power contributors, and some of you are going to end up with duds (which is why vesting is so important). Just know you can always increase the founder’s equity, but reeling it back is incredibly difficult (if not impossible), expensive (legal work ain’t cheap) and painful.

3 Keys to Splitting Cofounder Equity

1) Don’t avoid the equity conversation.?

Keep in mind while an equal split of equity may be less controversial and the easier decision in the early days, it doesn’t mean it’s fair or going to last. Avoiding a clear decision up front could lead to high-contributing cofounders becoming bitter over time at the misalignment of equity to contribution.

2)?Bake your Cofounder’s Pie

Use the Cofounder’s Pie recipe to get an idea for the weight of everyone’s contributions. Remember—It’s a guide, not a rule. Use your best judgment to align everyone’s equity with what’s fair, and have open conversations about how equity will be aligned to contribution, not merely split into equal parts.

3) Vesting, vesting, vesting!

The only behavior you can control is yours. Protect yourself and your fellow contributors by setting everyone up on a proper vesting schedule. Read “Venture Deals,” then find a great attorney to help setup your vesting schedules.

Know a founder who could use this advice? Be their hero, baby. Tag them!