
Unequal Cofounders - allenleein
http://blog.eladgil.com/2017/08/unequal-cofounders.html
======
btrautsc
My experience is the following:

IF you are starting a company with others, decide _week 1_ what the split of
equity is and who (of any persons included) are cofounders or part of the
"founding team".

IF you are starting a company with other cofounders, _week 1_ split the equity
evenly and assign functional roles (not necessarily titles - those can
evolve).

I have seen multiple companies explode, friendships deteriorate, businesses
die a slow death, or waste hundreds of hours (and dollars) working through the
emotional debt built up from not splitting equity evenly.

\- Edit - changed _day 1_ to _week 1_ because typically there is a process of
"should we start a company", "should we do it together", then "how" that takes
some time. But once the "we are going to do this phase starts, you're in _week
1_

~~~
tomaha
One important part you need to add: The equity vests over time. So if one of
the co-founders leave they just walk away with the part they earned over time
and not the same share as the rest that stays.

~~~
karmajunkie
A vesting schedule is so crucial. Many founders find themselves in the
position of being partners with someone who is all but inactive with a
substantial portion of equity. Not only is it unfair to those doing the work
but even if all parties are willing fixing the split later can be costly, time
consuming, and have serious tax implications.

~~~
windows_tips
Vesting isn't perfect though. It treats all contributions the same and only
really looks at the time it took to do some work.

The ideal situation seems to be that anyone doing work immediately vests
ownership upon performing the work.

~~~
krasin
This is very hard to administer and will be a source of constant debates. From
personal experience, such flexible system is not worth it.

------
gnicholas
The author focuses on several _extraordinarily_ successful companies, and it
may be true that a startup with one dominant founder is more likely to become
an _extraordinarily_ successful company than a startup with an even split.

But of course, the vast, vast majority of startups do not become
extraordinarily successful companies. Most fail, and of those that succeed,
most are moderately-very successful.

I wonder what the data is around moderately successful companies. It is less
important to me that I raise my chance of being extraordinarily successful
from .0000001% to .0000002% (a doubling!) than that I raise my chance of being
moderately successful from 20% to 30%.

It is possible that having an even split makes it more likely that you get to
some level of success, even if it makes it less likely that you make it to the
stratosphere.

~~~
jonathankoren
It's also important that point out that two of his examples of successful
companies because of unequal splits, involved very famous cases of the
dominate player actively screwing over and defrauding the other founders.

Yeah. I'm talking about Jobs and Zuck. Fuck those guys.

~~~
ganeshkrishnan
Zuckerberg was always the dominating founder of facebook. He programmed it in
php and he made it viral in the campus.

Jobs: I heard Wozniak gave up his shares to other co-founder voluntarily. Not
sure as I am as apathetic as possible about Apple.

~~~
jonathankoren
WRT Jobs, we have the famous “We agreed to a 50/50 split. It sold for $700, so
here’s your $350.” When in fact Breakout sold for $5000. Perhaps you’re
thinking of the time Jobs said “I give him nothing”, when asked about stock
options for early employees, and so Wozniak funded the pool himself.

Zuck famously fucked Eduardo Saverin by making sure Saverin’s shares got
diluted from 30% down to 0.4%, while protecting his own stake. There was a
huge lawsuit about that.

So no, this isn’t some decision from the start. these people have a track
record of screwing over their founders.

------
tw1010
Cool post. But I don't understand this obsession with taking lessons about
such miniscule variables as equal/unequal cofounders from such a small sample
set, like the top N=10 companies. There's no way, I bet, that that is enough
to determine with any actual statistical confidence what configuration of the
variable is optimal. Best you can do is take vauge inspiration from it, but
then it'll still be just word against word.

~~~
ojbyrne
It reminds me of a class I took in B-School called "Organizational Theory"
which was a essentially a long pointless discussion on whether the top level
of the corporate hierarchy should be split by product (you make 3 widgets,
each is a top level of the hierarchy) or function (i.e. sales, marketing,
finance, engineering).

As a company grows, people in authority often have few levers they can
actually manipulate, so they endlessly obsess over them. Especially if its an
engineering-centric company, and the person doesn't have any engineering
knowledge.

~~~
johnmaguire2013
Can you give an example of these "few levers" that they obsess over?

~~~
ojbyrne
It reminded me of the article - which is about having asymmetry of founder
power. Another one that comes to mind is founder age - younger is better.

------
dahart
> The key is to be pragmatic and to think through the long term value each
> person brings to the table, the relative leverage each has, and investment
> made in different ways.

This sounds bad to me - it might not be what the author meant, but it sounds
subjective. I feel like making the equity split subjective and based on some
perceived "value" of a person or their contributions is a way to guarantee
fights and bad feelings in the future, when the person who said they'd solve
all the problems backs out, or when someone unexpectedly invents the key
algorithm or closes the deal that keeps the company alive. The value of
founder contributions (other than time & money) cannot be known in advance.

There are ways to define contribution, relative risk, and time/money
investment in purely objective financial terms that are fair to everyone and
still benefit the early risk takers. Some of them have been posted already.

I did let someone talk me into inflating their share once, and it was a big
mistake. I wouldn't sign up ever again to start something with someone else
who argued that their share should be larger because they're more important to
the company or that their time is more valuable than anyone else's.

------
triviatise
My dad ran his own company for 35 years. One piece of advice he gave to me was
to always have control. My corollary to that is to be fine being a minority
stakeholder, but recognize that you don't have control so the one with control
ultimately will call the shots.

Over the last 15 years I have participated in CEO groups with around 30
companies. My limited anecdotal experience says that a 50/50 split is bad, but
a split where two people have leverage over a 3rd is ok. So a 3 way split is
fine.

Ultimately there just can't be deadlock, when everyone disagrees, someone
needs to be able to make the call.

------
sethbannon
Interestingly, this cuts exactly against the advice of Michael Seibel, the
current CEO of Y Combinator, who advises co-founders split equity equally:
[http://www.michaelseibel.com/blog/how-to-split-equity-
among-...](http://www.michaelseibel.com/blog/how-to-split-equity-among-
founders)

~~~
mmt
Some of the arguments are a bit difficult to follow, if not swallow:

> Small variations in year one do not justify massively different founder
> equity splits in year 2-10.

Yet this is, essentially, how it's done for employees. At least recently, YC
seems to be embarking on a campaign to bridge the gap in risk-vs-compensation
between employees and founders, as they did between founders and investors.

> More equity = more motivation.

I'm not sure this is always true. I can certainly attest to its falsehood when
equity is in the sub-1% range, as for most employees.

Even assuming its truth, however, since equity is zero-sum, that means that
the motivating ability (the "more"-ing characteristic) of equity is zero-sum,
too. It doesn't, however, mean that its motivating ability is the same on
every founder, nor that such motivation is of equal value.

> If you don’t value your co-founders, neither will anyone else.

> Startups are about execution, not about ideas.

Besides potential other critiques, the above two concepts seem, to me, to
contradict each other.

> Equity should be split equally because all the work is ahead of you.

> what we almost always recommend at YC: equal equity splits among co-
> founders.

All that said, I think this is probably the best reasoning: equity split at
the beginning isn't likely to be something worth spending a ton of time/stress
on for the vast majority of early startups, so equal split makes a sensible
default.

------
dxhdr
I'd like to read about first-hand experiences founding startups with equal or
unequal equity splits. A postmortem of sorts, what worked about the founder
arrangement and what didn't and why, or if it was even a relevant factor at
all.

I could believe that unequal equity splits are common in these mega-successes
just because everyone involved is savvy enough to push hard for their own
interests, but that ultimately it's an irrelevant detail to the success of the
business. They'd be successful either way, but this way is the best possible
outcome for the founder.

~~~
e40
_I 'd like to read about first-hand experiences founding startups with equal
or unequal equity splits._

30+ year old company, started with equal split (5 ways, 1 founder bought out
early).

We are not hugely successful, though I have a nice house in a nice & expensive
city because of it. It is my belief the company would not exist if the CEO had
gotten control early on. The equal equity was a check & balance on his power.
However, there are really two possibilities:

1\. The check on his power prevented us from being wildly successful because
there was too much consensus needed for risky, but potentially rewarding,
decisions.

2\. The check on his power prevented him from screwing over everyone else.

On #2. About 7 years after starting, my CEO intimated to me that he made a
huge mistake with the initial equity split, and when I asked why, he said he
would be cash cowing the business for his own personal gain and he would be
much wealthier. Now, he didn't phrase it just like that, but that's what he
meant.

The truth is, once you have control of the shares, you can do anything to
anyone.

I won't give the name (let's call him Mr. X), but an early investor in the
company was serially successful at startups and making a lot of money. Two
related facts about him:

* One of X's co-founders once told our CEO that he made almost nothing from the startup that X had made many millions from. His initial stock had been diluted to nothing, because X controlled the majority of shares and the board.

* In the 90s the SEC went after X for dubious sales practices (selling hardware and buying it back under the table to inflate company value... yes, they were public). He paid a large fine and agreed not to be an officer of a corporation for 10 years, but he died before that expired.

After these two events, I started to look at successful people in an entirely
different light. Nothing I've learned in the 20 years since has changed the
view that 99.9% of successful people, aside from being smart and hard working,
are either in the right place at the right time or use ethically dubious
methods to get ahead. There are exceptions, but they are exceedingly rare.

Sorry for the rant.

~~~
jiveturkey
> _1\. The check on [CEO 's] power prevented us from being wildly successful
> because there was too much consensus needed for risky, but potentially
> rewarding, decisions._

Wait, so equity share dictates consensus? In my 20 years of working in
startups, I haven't seen a relationship between share ownership and board
control (other than chairman) and the company executives.

The CEO dictates what happens, period. He can either be a consensus builder --
to his benefit or detriment as the case may be -- or a dictator ala Jobs. Just
because everyone has an equal share doesn't mean the CEO needs to build
consensus. And he doesn't need a check & balance on power. He is in the
position of CEO because the rest of the folks trust his leadership, not
because he has 1/5 + 1 shares.

It sounds like you had poor corporate governance, unrelated to equity sharing.

EDIT: TFA states this directly, as well.

> _Unequal co-founder relationships are a way to dampen future co-founder
> issues. By making it clear how decisions are made and who is in charge
> early, you decrease the likelihood of a founder blow up. This is separate
> from how you divide equity ..._

~~~
e40
_Wait, so equity share dictates consensus? In my 20 years of working in
startups, I haven 't seen a relationship between share ownership and board
control (other than chairman) and the company executives._

If all the shareholders are employees _and_ the CEO has a minority share _and_
the other employees have a majority, then they can force the CEO out fairly
easily. That kept things civil, in our case.

 _Just because everyone has an equal share doesn 't mean the CEO needs to
build consensus._

Again, you are right, to a degree, but even if all employee founders were
fired, they could band together, in the situation being discussed, and toss
the CEO. That changes the psychology of the situation.

------
tptacek
I'll only work in equal-split partnerships. But that doesn't mean every
partner has an equal say in the business; I'd also be leery of working on any
founder team that didn't have someone designated as President or CEO.

~~~
optimuspaul
For me I think it's too complex an issue to say equal-spit or nothing. Not
every partnership has partners taking on equal risk or bring equal capital to
the table.

100% agree with team needing a President or CEO. to expand on that, co-ceo's,
that's bonkers.

~~~
stickfigure
I don't think this is too complex at all. I know what the process of raising a
successful startup from scratch is like, I know what I bring to the table, and
I also will only consider an equal split.

My direct observation is that capital is one of the least critical things
someone brings to a software startup at day 0. A nontechnical CEO that brings
funding is not entitled to special endowment; _that 's their job_.

~~~
optimuspaul
I was asked to join a startup from scratch that wasn't offering me an equal
share (I may be proving your point here), the other founders were taking a
much larger risk than I. So they wanted a larger stake. I ended up not going
and the whole thing fell apart. I felt like you at the time. But now I've come
to realize that what I thought I was bringing to the company was actually
worth a lot less that what they were bringing. I believe now I would be in a
much better place had I accepted the offer. My point is just that I believe it
is complex and you may not think it is, but maybe you are not giving it the
thought it deserves. I didn't fully understand the sales side of the business
how how critical that is.

~~~
stickfigure
I have been through this now a few times.

Yes, the sales side of the business is critical. So is the engineering side,
and the product side, and the support side. In a startup _everything_ is
critical. Which is why an equal share is the only reasonable approach;
otherwise you're arguing over which of your organs is more important, your
heart or your lungs or your liver.

If your founding team thinks "sales is less important than engineering" and
thus deserves a smaller share (or vice-versa), you're already set up to fail.
I went through this once with a CEO with an outsized belief in his
contribution and I consider the lesson learned.

I'm sure there are plenty of exceptions to the "equal share" rule, like very
junior engineers - but you might want to consider whether that's a good idea
for a startup.

I look at this from the other side, btw. In my current startup I had the moral
authority to demand an asymmetric split, but I chose an equal split anyway.
We're going to be at this a long time. Day 0 is a dumb time to get greedy.

Or look at it this way: The other founders in your company got greedy and
missed out on an opportunity to bring you on board, and your contribution may
have been the difference between success and failure. That's their fault, not
yours. I hope they've learned their lesson.

------
kareemm
Isn’t Google the obvious counter to this? IIRC Larry and Sergei were equal and
possibly co-CEOs until Eric Schmidt was brought in.

One of the biggest companies in history is a major counterexample to Gil’s
argument and deserves more than a footnote about equity split at IPO.

------
tempdeadbeef
Can we get some examples where the dominant cofounder was the reason why the
business did not succeed? These success stories reference generally smart and
savvy executives.

------
ironjunkie
disagree with this article. The so called dominant co-founder is the one that
is most visible from the outside. It is not clear for example if Jan Koum is
the dominant co-founder in WhatsApp. He is the most vocal one on the outside,
but who knows how it works on the inside.

I tend to believe that people that spend a lot of time advertising themselves
on the outside, do not spend a lot of time managing things on the inside of
the company.

------
rweba
The book "Slicing Pie" delves into the topic of how to split equity before
receiving any outside funding in detail:

[https://www.amazon.com/Slicing-Pie-Funding-Company-
without/d...](https://www.amazon.com/Slicing-Pie-Funding-Company-
without/dp/B00MFXJJYS)

[https://slicingpie.com/](https://slicingpie.com/)

The idea is to dynamically adjust equity based on how much everyone is
contributing.

Some people report good experience using this dynamic split method:

[https://cofounderslab.com/discuss/has-anyone-used-the-
slicin...](https://cofounderslab.com/discuss/has-anyone-used-the-slicing-pie-
method-of-managing-equity-allocations-through-a-grunt-fund)

With that said, I am sure there are a lot of different methods that could work
depending on the people involved, it's not as if there is only one "right" way
to do it.

------
dpeck
The founders equity calculator gives a nice way to look at this and adjust
variables (that of course plug into their formulas/values)
[http://foundrs.com](http://foundrs.com)

------
snogaraleal
This post is making a point about _leadership_ more than anything, not equity.
It's saying that the easiest way to have a consistent line and to operate
without hesitation is to have a dominant co-founder or, at least, a dominant
vision.

------
payne92
I wrote up a model for dividing equity in the very beginning, and it often
ends up with different splits among co-founders.

See: [https://payne.org/blog/dividing-founder-equity-in-the-
very-b...](https://payne.org/blog/dividing-founder-equity-in-the-very-
beginning/)

TL;DR: (a) figure out ratios of ownership in the beginning (vs absolute
percentages), and (b) use simple "buckets" of contribution to figure out the
ratios should be.

For example, the two founders that have been working on the idea for 6-12
months may end up with more equity than the next "founder". Or a part-time
(e.g. academic) co-founder may get a little less.

~~~
gakos
If you are going down the unequal route, I recommend an approach like this. We
used a spreadsheet with weighted buckets. This forced us to define the weights
as well as our respective contributions and overall made the process
transparent.

------
iMuzz
Here's what I want to know.

"The most successful" being defined by some metric (public valuation, exit
price etc.)

Then look at all the companies that qualify by that metric, and then see what
% of them are unequal equity splits.

I definitely agree that there should be a clear leader who makes the call. But
the argument for an unequal equity split feels extremely weak.

------
ronilan
_“All founders are equal, but some founders are more equal than others”_

—- George (The Startup Farm)

------
halayli
Ignoring whether correlation is the causation here, this post demonstrates a
confirmation bias. Id like to see another list of successful companies with
equal cofounders to be more objective.

------
Yizahi
Unequal cofounders is a great to basis for future unequal equity for
employees. "Mister Future Employee, you see that even the second person in the
company has much less equity that CEO, so you should be content with your
0.00001% vesting over 50 years. Just imagine how big a payoff will be when
we'll sell for ten trillion dollars."

------
diN0bot
there are multiple configurations of compensation, equity and decision making
that are not equal, but which all parties can feel good about agreeing to.

the problem is when folks behave secretively, tilt too far towards
selfishness, and lose respect for others.

------
danschumann
This all seems like common sense, but the article articulated it very well.

