So you’ve got the next unicorn worthy concept, a new vision to reshape and redefine the very fundamentals of how we live and work. You’ve also put together a team of cofounders with whom you will turn this vision in fact.
Before you jump into the partnership, however, you find yourself the discussion table wondering how you should split the equity. Should you be taken the lion’s share? How much more should you get than your cofounders? Or should you just go for equal split between everyone? But how equal? Exactly down the dividing line, or with you still holding a majority and therefore the final say?
As the founder, you might think that you should be taking a significantly higher share of the pie. We suggest thinking otherwise.
In the startups we work with, we often see unequal splits (or just one founder having everything). The usual reasons include:
- You came up with the idea
- You started doing this full time, without pay, months before your cofounder joined
- You have more experience, and are taking on a leadership role
- Your cofounder is only joining after you have scrounged and fought for a first round of funding
- You want to retain control in case of a founder dispute down the line
- And so on…
Essentially, there could be a number of reasons why you think you should have a much bigger slice of equity, and ultimately, how you make the split is up to you. But before you make the call, here are a few important things to consider:
Equity is motivation
Fairly common sense — the more stake a cofounder has in the venture, the more motivated they’ll be to see it succeed. You will all have to pull all nighters on Sundays and public holidays to make things work, having a more equal share will help you feel like you’re in it together.
It’s not just about the idea
A great idea is nothing without the execution. Developing and pushing the product to market, generating traction, implementation and operation are all parts of the journey. So you should put into consideration when deciding the equity the hard yards that your cofounders will need to put in to realize the initial vision, the sweat and tears that will be called for so to turn the concept into real, tangible value.
The money notices
The quality of the team is one of the most important factors that investors consider when they’re deciding whether or not to commit to your venture. A brilliant concept for a product may stay just a concept it there isn’t an ambitious and capable team behind it. Infighting and incompetence are quick killers of progress. Having a more equal share between cofounders shows that you back your team, and could be a vital figure to tip an investor between yes and no.
Startups take time to start up
To generate real value out of a company, it can take anywhere from 5-10 years (or longer) before you can see any substantial returns or nab the fabled exit to set you up for life. In the meantime, you and your cofounders (as well as your growing team) will be paving stone by stone towards success. The initial equity should reflect the longevity of the commitment you are all about to embark upon.
Of course, riding as you are in the rough world of tech entrepreneurship, there is always a chance that things go sideways and you’ll have to break up with a cofounder. To get ahead of the possibility of an ugly divorce, you should look into making a vesting schedule. This is essentially a probationary period for equity entitlement. If they leave or before having stayed with the firm for certain period of time or are fired within, say a year, they will walk away with nothing. After a year, they get a portion of the promised equity (let’s say 25%), and for every month or quarter thereafter they earn a little more until they receive their full share.
At the end of the day, it is up to you how to divide up the equity. But we think that companies work best when everyone involved feels like they all own a piece of what they’re building together, it promotes a sense of camaraderie, and each and every one gets to witness the fruits of labor — and taste it, too.