

More on splitting equity 50/50 or not - lvh
http://swombat.com/2011/5/10/founder-equity

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wolfrom
I think this explains very well why in my situation with my co-founder, I
don't feel like anything but 50/50 would work, but yet I still agree that such
a split is inherently risky.

While my co-founder and I have the benefit of knowing each other well and
working together for twelve years, the strength of that relationship would
make it impossible for one of us to have an overruling power.

We do have sectional overrules, however, where as "CEO" I have certain areas
that are "mine", and as "CTO" there are areas that are up to him. But neither
of us can overrule on the bigger questions like selling, shutting down, moving
to the Bay Area, etc. It's not the 50/50 that prevents that, it's the pre-
existing relationship. No differing equity split would remove the damage that
unilateralism would cause.

So I don't think we ever had an option on how to split. But that's not the
same for everybody.

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ivey
I wouldn't start a company with someone where the relationship wasn't based on
fairness. If I don't trust my potential co-founders enough to share the
company equally, they shouldn't be my co-founders.

EDIT: s/your/my/, s/you/I/ ... my personal position may not be best for you.

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wccrawford
Your apparently definition of 'fair' is '50/50'. I have a different one: You
share it according to what you bring to the table.

If you really are bringing the same value to the company, then 50/50 is
correct. In reality, that's not likely to be the case.

The CEO needs to be the guy that holds it all together. That's a lot of
responsibility, and requires some serious
knowledge/education/experience/talent/etc. As much as I like to think the
developer is the lynchpin in the company, it's actually the CEO. A bad CEO
will destroy a company faster than a bad developer. And a bad developer is
easier to replace.

As the article says, the split will depend on the people involved. There's no
magic formula for figuring it out.

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ivey
I'm saying that the article is correct, and also that I personally only want
to do companies that fall into what he calls the fairness category.

The article does not say that 50/50 makes sense if and only if you bring equal
things to the table. That's an unequal split argument in disguise.

Out of curiosity, do you want a larger stake because you want more money, more
control, both, or for some other reason?

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robryan
I think fairness and motivation is another reason, if your bringing a lot more
to the table you want to feel that your efforts are being rewarded
proportionately. It's not really about money as most of the time companies
aren't going to hit it big, and I don't think it's really control either
because the person with the minority stake is going to get demotivated pretty
fast to if they are overruled on everything.

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freshfunk
A key point made that's relevant to a many other parts of a startup is this:
It depends.

People want simple answers to questions that are actually complex. In this
case, it's not that it's incredibly complex but that there is no ONE right
answer (50/50 or not 50/50). (At least, this is my humble first-time-
entrepreneur take on the matter.)

Furthermore, everyone has their own bias and point to their own anecdotal
situations as proof that either 1) they are right or 2) the other person is
wrong. And yet they don't realize that that both cases can be true (that is,
their solution was right for their situation and the other persons solution
would've been wrong for their solution but right for someone else's).

In my case, 50/50 (or even split) would've made sense early one when I first
started. And this is what I was aiming for. But, as time went on, it became
apparent that I would be leading this startup by myself. As time went on,
50/50 just made no sense since I was putting all my time/effort/ideas into the
project, full-time.

These days, I would never accept 50/50 even if that other person is a friend
(mind you, I've been working on my startup for over a year and have a live
product and users). Fairness, in my case, isn't about 50/50 but giving a fair
share.

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ansy
I think the author conflates fairness with equality and inequality with self
interest.

You can be fair but unequal and unfair but equal. Also, just because you might
be getting the smaller share of an unequal deal does not mean you aren't still
serving your self interest.

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swombat
No, I think you misunderstand me.

The purpose of a 50/50 split is effectively to convey the following point: "We
could argue about this and come up with some percentage split, but actually,
the most important thing isn't for the percentage to be accurate, but for it
to make both of us feel like we've been treated fairly and equally." It sets
the tone for the rest of the "adventure". "We're in this together, whatever
happens!" is the core message.

This is important when the relationship between the founders is, in a way,
irrational, based on unconditional friendship, and that relationship is being
transferred into the business context.

The purpose of an unequal split is to fairly (!) represent the different
contributions to the business. "I'm bringing in all those things, and you're
bringing in these things, and so I deserve 70% of the business and you deserve
30%." It also sets the tone for the future. "We'll each get the part we
deserve" is the core message.

In the equal split context, it's unlikely that either founder will walk out
unexpectedly, so long as they both entered into this with their eyes opened.
With the unequal split, I believe it's a lot more likely - if it ends up not
being in the self-interest of one of the founders.

Having the larger share doesn't mean that you won't walk out, either. I was in
a 70/30 split in my first startup, and I had the smaller share... and my
cofounder effectively walked out of the business! I was shocked, because I
thought that we were in it together, but it made sense from my cofounder's
point of view because the business wasn't making enough money to be worth his
time, so it was not in his self-interest to continue it.

~~~
ansy
I understand what you're saying, but fairness is a poor word to use for what
you're describing. Especially when you use it in contradicting ways.

In your first example equality is "fair and equal." Removing the "equal" as
redundant, you end up with equality being fairness. In your second example
inequality is fairness. But somehow the second example is not "fairness"
according to your article; it is "self interest."

I guess my argument is that in any relationship self interest and fairness are
the same thing. To long time friends, 0/100 could be considered fair because
it's not really 0/100. There's a lot more equity there than the company. Maybe
the guy's a great fishing buddy and some tiny venture is worth so little
compared to that you'd just as well give it all to your friend so he can spend
more time fishing. Also, because your investment with the person is so much
more than the size of the venture, the total cost of walking away may be much
more than you are currently losing on the venture.

Contrastingly you might not know a cofounder at all. Your relationship with
him is worth virtually nothing going in. All you've got is the value of the
venture. So as the disparity of initial contributions grows, so grows the
desire to find a more accurate equity split. Likewise, because the value of
the relationship is only the value of the venture, the cost of walking away is
much lower so it is easier to reach that point.

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aaronf
A good example you can cite is Bill Gates and Paul Allen. Despite both making
billions, the recent publication of Paul Allen's autobiography shows how
equity impacted their relationship and friendship (and still does to this
day). Whether Microsoft would have had the same success if they had been 50/50
is another question.

Thanks for writing this. I know of several people who have been trying to
vocalize their support for 50/50, and you nailed it with self-interest vs.
fairness. Ultimately, the decision should be made in the company's best
interest, and not either of the co-founders, resulting in the best long-term
results for everyone.

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brudgers
Paradoxically, if one's self-interest is not aligned with that of the other
cofounders closely enough that the potential long-term benefits of an even
equity split (e.g. flexibility to pivot without redistributing equity and
building the sort of consensus based decision making process required to
maintain founder control following significant outside investment) outweigh
the short-term personal benefit, then an uneven split is more likely to move
those self-interests further apart rather than to align them more closely. In
other words, if your self-interest isn't best served by your cofounder's
success then why have a cofounder?

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everlost
We had a slightly different approach to solve this problem of fairness vs.
(encouraging) self-interest:

Anyone who contributes and sticks with the project till the end, has a stake
equal to number of hours put in multiplied by number of users/sales that
resulted in (divided by everyone's hours of course). Anyone who contributes
but doesnt stick till the end i.e. raising capital, doesnt get a stake but
gets compensated at twice the market rate for that skill (when we raise
capital).

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programminggeek
I think it depends a lot on what it is that you want your company to be and
how many people you're talking about. Also, there is a difference between
wanting equity for control or equity for getting a share of the profits.

With 2 people: I think either you have a 50/50 split or you might as well have
99/1 or even 100/0. Anything more than 50/50 means one person has effectively
total control. Thus, why pretend it's anything other than a dictatorship in
that instance? If you both want control, you need 50/50.

If it is about making money, then in place of an equity stake, you can have a
revenue sharing agreement that would provide a % of revenue or profits or even
a % of whatever the company would get bought out for. The amount each person
gets in that instance could vary a lot more based on contribution or whatever
"fairness factors" made the most sense to both parties.

The point is, control and profit sharing are two separate issues that often
get lumped into the equity discussion when they don't have to.

With 3+ people, I think the same rules tend to apply. I think for sake of
simplicity it makes the most sense for smaller (non-VC backed companies) to
split equity evenly among the founders or have a single person who has 100%
control. Then, do revenue/profit sharing amongst everyone as is deemed "fair".

If you are VC backed, well that's a different ballgame all together.

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danshapiro
This is incorrect. Shareholder votes are only one control provision; board
seats are another. If you both have board seats, your cofounder has an
effective veto on major transactions.

Don't get clever with "revenue sharing agreements" etc. You want to innovate
in your core business, not in financial instruments. The alternative is a
world of unintended legal and tax consequences.

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suking
What's it matter if you raise large amounts of $ - odds are the VCs have true
board control or at least blocking power.

