Why 50/50 rarely works for founder equity splitting

One of the biggest unseen causes of venture failure is founder conflict. It's a little known and rarely-discussed cause of startup failure. But it's one of the most unsung and very biggest.

Many of the ventures that you will discover that fail, as often not as a result of the oft-quoted reason for failure, such as "ran out of money", "no market demand", or "lack of ability to commercialise". But that's often not the real cause of failure.

Few people like to discuss their personal failures faults or liabilities, so what you get is the sanitised, glossed-over reason.

No, the real reason that most ventures fail, is in fact because the co-founders couldn't figure out how to get along (especially when the going gets tough), and that the subsequent infighting over value (or lack there-of) of their combined equity, is the catalyst in precipitating of venture failure.

"Fair is not the same as Equal"

I am proud to say that that my co-founder, Grant Downie, and I have very few difficult conversations. Because from the very beginning, we came in to our new venture with the pre-condition that our respective 'slice' was equivalent to each of our contributions to success, and no more.

Each of us had seen ventures (many of them) that had failed as a result of founders who could not come to grips with a formula for how to separate the value of their input from their the value of what they had created.

And both of us had seen, or been party to, conflict as a result of founders not being able to agree.

As a result, many, (if not most) have walked away empty-handed as a result of not being able to agree on some of the very basic and fundamental principles of business, which I'll come to in a minute.

During, or after, the fact, it's often not an easy conversation. "I did this", or "I contributed that", or "the value of my introductions was worth X". And it's something that we see time and time again. And surprisingly, most of the conflict is between people who have put in place detailed, and often very expensive, shareholder agreements.

So what is wrong with this picture?

By all means, once you've taken any level of significant investment, you should have formal agreements, boards, and methods of dispute resolution. But do you really need that at the beginning when you've yet to determine the true & ultimate value of a venture?

My view is absolutely not. How can you split the value in a venture before you've crated any, or that you know if there's even a market, an audience, or before you have something top sell?

Better that instead of spending money on expensive shareholder agreements and the like, you instead spend that money on actually testing whether you even a have demand for a product or a service for a business.

Which is exactly what we did.

Grant & I don't own the same slice. In fact neither of us has yet agreed on what that slice is. However we have agreed on 3 key elements.

1. That between us, we agree that we own 100% of success - or failure, and
2. That the method that we use to split our equity is based around agreed to principles (which are modelled in a spreadsheet), and
3. That they are (and will always be) in line with our fundamental principles of FOOT. (Fairness, Open-ness, hOnesty and Transparency)

We don't have lawyer or jurisdiction to resolve disputes, we have no 40 page agreement that lays out possible scenario should worst come to worse, and we have no agreed mechanism for dispute resolution. Because we need none of these.

What we do have is a 2-page agreement which details how we split, what we split, and what we need to do if we don’t agree. And we did it without lawyers, mediators, negotiators or third-parties, from day 1. 

About 2 years ago, we discovered a mechanism, called "Dynamic Equity Splitting", which helps that process, though in Australia, it took us another 18 months to modify the framework to comply with local laws, to suit the manner that I described above.

If that appeals, reach out to us to talk about how you can implement this for your new venture.

What do great business relationships look like?

Business relationships are no different to any other successful relationship. They take effort, work, a shared vision and 4 key characteristics to succeed.

1. Common Interest (what we want)
2. Commonality (how we think)
3. Communication (what we say)
4. Connection (how we relate to each other together)

Though unfortunately when one or more of these areas is missing, it's like taking away legs from a chair. With just 3, you can stay balanced if you pay attention, but beyond that, someone going to end up on the floor in tears.

How do we avoid conflict?

Two critical elements of venture success were apparent to both Grant & I from the beginning.

1. If you both agree, then one of you is not required, and
2. If we can't find a way to progress to success, then what the hell are we doing in business together?

On first read, those 2 statements sound like dichotomies. But in fact they are perfectly in harmony. Grant & I almost never agree on method, process or frameworks.

I drive him crazy with my incessant ideation, opportunity, productisation and ability to imagine solutions to compelling problems. He drives me nuts with his process-driven, pragmatic and outcome driven approach. And yet, we are still "two peas in a pod".

We both absolutely agree on purpose, values, outcome and intent. So we've learnt, very quickly, to discover how to get the best out of each other as we drive toward discovering "the undiscovered country" around startups and venture creation.

Grant relies on me for my foresight, and how I see spaces, markets, audiences and pathways that few others can see, and I absolutely need his grounding, perspective and reflective abilities.

Interestingly as we've gone on down the path, our thinking has become more aligned, to the point that Grant is become more interested in ideation, and I'm getting better at process. Go figure?

In conclusion, you should do key things in looking for, and working with a co-founder. You must have a:

1. Common view of what success looks like.
2. Complimentary skills set in creating that vision, and
3. Shared purpose in how to achieve that vision.

If you don't have those, all we can do is encourage you to find them.

And if do you have all those, we can happily help you with a framework for how to deliver on that in a way that encourages collaboration and founder-friendly equity sharing. To learn more, register below, get some insight on how this might apply to you.

"To Your Success", Daniel

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About Daniel

I'm a founder, mentor, advisor, investor, venture catalyst, accelerator, and venture capitalist. Also traveling under the alias of 'That Startup Guy', I am a co-founder of StartUp Foundation (The Startup Accelerator for Experienced Professionals) and am intensely, deeply, passionately dedicated to "The intersection between personal mastery & business entrepreneurship".

My goal is to help you, by guiding you through the steps, and past the challenges and pitfalls, to turn that 'Great Idea' into reality, whether it's a business, service, product, or to disrupt an entire market.

And if you've got an experience about startup success (or failure), comment about it. If you've got a question, reach out to me via your preferred social media. Other posts can be found here on Linkedin.