

Don't Be Pied Piper #1 – How to Divide Equity Among Startup Founders - RedditKon
https://www.legal.io/guide/555be3a277777738de6f0000/Don-t-be-Pied-Piper-1-How-to-Divide-Equity-Among-Startup-Founders

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greggman
I'm really curious what most people do now-a-days. A long time ago I started a
company with 3 friends. We were advised to divide the company basically by
shares/points/option. We each got 1 point for each month we were with the
company. So first month each of us has one point. Second month each has 2
points. If someone quits then in 6 month it would have been 6, 6, 6, 2 which
means the 4 would own 30%, 30%, 30%, 10%. In a year it would be 12, 12, 12, 2.
That's 31.5% each for the 3 remaining partners and the guy who left is now
down to 5%

At the time that seemed like a great idea.

Then I listened to the podcast, Startup and I hear the Alex Bloomberg offer
his partner 10%. "Seriously? You haven't actually done anything yet". It
seemed to me he should have used the point system. At best he should start
with 2 or 3 more points (or heck even more because he's the "talent") but
otherwise given there was basically nothing to the company yet it seemed fair.
If his partner puts in the time in a few years they'll be nearly equal.

They settled on some random numbers but it seemed short sighted. Maybe they'd
need another partner. The points system seems to work. New partner starts, you
decide on some starting points, possibly zero, just vest your points. If it
was 5 people who've been working a year and you come on at the end of year 1
then in 4 more years it will be 60,60,60,60,60,48. That's 17% for the 5
originals and 13% for the new partner

The 2nd season had the same issue. Instead of going by time invested in the
company they were just picking random numbers. It seems very arbitrary and
unfair. Of course maybe the point system is just as unfair to some.

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shalmanese
What a lot of people fail to understand is that successful startups derisk in
exponential steps. It may seem unfair to a lot of people that early employees
are paid 2 or 3 orders of magnitude of equity less than founders for doing
perhaps even more work. What they fail to understand is that they're not being
paid equity for work, they're being paid for risk.

Successful startup founders are obsessed with derisking at every step along
the way and even when it seems like "they haven't done very much", the stuff
they are doing is relentlessly pushing a startup through the various gates in
which a certain percentage fail at every gate.

So it wouldn't surprise me if a reasonable equity split for Gimlet ended up
around the 90/10 range. Considering that Alex managed to raise $1.5M almost
entirely based on the back of his reputation, he's really offering ~$700K of
equity to his co-founder vesting over 4 years. There's no way his other co-
founder could have found an opportunity that big through any other avenue so
it would have been smart for him to take the 10%.

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shalmanese
Ultimately, equity math is less about math and more about psychology. Startup
success is binary so the fine details of the split end up not mattering at the
end of the day. What's important is that the process you use to assign equity
leaves everyone feeling it was more than fair.

You could start with a team of talented people and arrive at the same equity
numbers via two different processes and one will result in a billion dollar
company and the other a million dollar company because the founders are
motivated in the first and discouraged in the second. What's ideal is that
each founder believes they got way too much equity and is glad to be a part of
the team. Put in that perspective, dicking over 5% isn't something that should
be encouraged.

This is why founder chemistry is so important. If you're considering co-
founding a company with a person, run this hypothetical in your head: You have
both just sold the company for a billion dollars and you get 70% of the sale
and they get 30%. Are they happy that they're now worth 300M and even happier
than you're worth 700M or are they jealous that you got the way bigger share
of the pie than they did? If it's the latter, run away immediately, there's no
good outcome possible there.

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krmmalik
The live chat button on the website doesnt seem to be working. I wanted to ask
if the site hosts lawyers outside of the US in places like the UK for instance
as I'm currently looking to start a conversation with a legal expert on some
startup matters.

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RedditKon
Hi!

I'm part of the team over at Legal.io. What browser are you currently using?
That can help us to troubleshoot the issue with our live chat.

In the meantime - feel free to shoot an email to hannah@legal.io with your
question and our team will respond to you shortly!

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thisisafounder
This is a really important article!

I've found that a lot of my fellow founders have faced trouble when going to
raise money from investors simply because they either looked uninformed or
careless when dividing up equity!!

Make sure you don't fall into that trap.

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wilburlo
Dividing up equity is an ugly issue, because sometimes it's more about
availability of talent, contract clauses, time (4 years is not a lot of time).
Best to get it right the first time.

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ysiadf
Are you saying you think it makes sense to have vesting schedules longer than
4 years? I've seen "evergreen" clauses where employees constantly get new
options, but not vesting schedules longer than 4 years.

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wilburlo
I've spent 2 years as a founder at my start-up and it seams like a drop in the
bucket. I was just able to turn around twice and all of a sudden, I'm 50%
though my vesting period. But then the other founders are 50% or more though
their vesting period as well.

It may well take 8 years to get this company to IPO. 4 years seams standard,
but it feels awfully sort for some reason.

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RedditKon
All feedback from startup founders welcome!

