
The only wrong answer is 50/50: Calculating the co-founder equity split - jheitzeb
http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split
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webwright
I'm in the "thought provoking post, but disagree!" camp on this one.

As a guy who has been the CEO for most my startups, I'd NEVER say that I
deserve more equity because of that.

Also, 5% for the IDEA? Jeebus. Is THAT idea the source of your eventual
triumph? Or is it the 100 ideas that come later? If you pivot from your idea 6
months down the road in a direction your co-founder suggests, does he get a
portion of that 5%? Or perhaps more, because it's your (now shown to be a bad)
idea that wasted 6 months?

I DO agree that you need rules for who wins when a disagreement can't be
resolved-- you can have those rules without handing over equity. You should
also have rules for dissolution.

Co-founders are a market like any other. With these rules, and with Dan's
outstanding reputation, I have no doubt that he could land a co-founder. But
it'd always be a lesser co-founder than he COULD get. Minority shareholders
are also more likely to bolt/get grumpy when things get rough.

In short, Dan's trying to maximize his personal wealth in the (exceedingly
rare) event that the startup wins (sees liquidity) rather than maximizing for
the company's chance of success.

~~~
TheIronYuppie
I'm more in the "thought provoking and agree" camp. I'm not sure that of the
potential downsides to Dan's strategy, a significant impact to the success of
the company would be among them.

The idea _does_ get too much value here - I'd definitely put that at zero. But
in my startup experiences, the CEO _does_ have to deal with a lot more
annoying shit, and put her name on the line far more than anyone else, and
should get the credit for doing so.

Further, I'm more in the Zappo's camp here - if a minority shareholder wants
to bolt, I could not be happier. Leaving a company is always a hard decision,
and if they're not cut out, AND they've come to that conclusion on their own,
then FANTASTIC. I don't think that having 50% equity makes ANYONE more likely
to stick around - you either have it in your DNA or you don't.

~~~
webwright
"I'm not sure that of the potential downsides to Dan's strategy, a significant
impact to the success of the company would be among them."

Really?!

Employ that strategy and then interview a series of great co-founder
candidates. If they bring more to the table than you, imagine their response
when you say, "You're bringing more to to the table than I am, but given that
I will be CEO and the idea is mine, I think I should be getting slightly more
equity than you."

The "you should have this in your DNA and thus shouldn't be motivated by
equity" argument has nothing to do with Zappos. Staying or leaving is almost
always based on a lot of things (equity, comp, passion, team, opportunity,
risk etc). Everyone weighs those differently, but very few people ignore the
equity/opportunity part of it entirely.

If you subscribe to that argument, why exactly are you reaching for more than
half of the equity pie? Or reaching for ANY of it? And why offer stock options
at all? Telling people to "do it for the love of the game" is a pretty self-
serving thing to say.

~~~
danshapiro
Tony, I think you're arguing with a strawman. Per the original article, if the
CTO is bringing more to the table than you, then _you_ get +5 for being CEO,
and _they_ get +5 for idea, and/or +15 for patent, and/or +50 for being so
awesome they could get funded without you.

I see people disagree with IronYuppie (I do too - I don't think the CEO job is
harder than the CTO job) but I'm not sure why it's getting downvoted.

~~~
webwright
By your formula, someone with a equal or barely-lesser contribution could have
a greater equity share (CEO, idea). That's my gripe, boiled down. Don't think
it's a straw man.

Ideally, it's close-- i.e. there is no ugly duckling. And where it's too close
to call (i.e. you don't have a credible argument for why one person will have
a greater contribution), I think erring on the side of almost-parity is the
way to go, because stuff changes too fast and anticipating contribution is
HARD. Today's shit-hot idea may be DOA in a month. Today's CEO may shift to VP
Bizdev next year. Fundraising connections may come up dry when they are
tapped. If any/all of that happens, then you have one guy saying, "Wait, he
gets 65% of the company because of all of these contributions that really
aren't working out. How non-awesome is that? And my good college buddy just
asked me to jump into this NEW idea with 50% ownership... Hrm.".

Those are non-trivial risks for nearly-trivial (risk adjusted) dollar figures,
IMO.

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spolsky
A lot of times I hear from people who are phobic of the 50/50 split because
they're confusing control and ownership. There's no reason you can't split the
ownership 50/50 and still decide that one person is the CEO and therefore has
final say on all decisions. If you're still freaking out about this use a (50%
+ one share) : (50% - one share) split so there is a built-in, pre-agreed way
to resolve conflicts.

That said, burning bridges can be a great strategy. Knowing that your co-
founder is in exactly the same situation as you and that things are perfectly
symmetrical can force you to actually resolve conflicts, because it takes away
the option of one person shoving a decision down the other's throat.

~~~
vessenes
Interesting comment; in my experience 49.9% is worth a lot less than 50.1%, in
fact, I once sold out a minority stake in a company I had originally retained
majority ownership. My council told me typical valuation cut for a minority,
non-controlling share was like half.

This implies to me you should really shoot for 50%, and make sure you like
your joint decision-making process. Of course when you get some funding in,
one of you will have to agree with investors to force something through the
chain.

~~~
brudgers
Differences in equity often make little difference in terms of control, e.g.
in an YC like 8/46/46 split all three have equal control when push comes to
shove. Even in Shapiro's three way example, control is equally distributed.

Even with a Shapiro type 55/45 split, once the firm takes significant outside
investment (or provides employees meaningful equity); the balance of control
will shift to where the founders have to work together as equals. An advantage
of the Spolsky approach is that the company operates that way from day one,
and outside investment might be less likely to disrupt the decision making
process.

~~~
kelnos
Another way to look at your point is that once you get outside investment,
"control" between the founders is irrelevant, so you should reward the
founders up-front based on merit (as Shapiro's article suggests) instead of
based on some soon-obsolete notion of who controls the company.

~~~
brudgers
In real life, I would have no problem with your suggesting Shapiro's model for
initial unequal equity split - so long as you wind up with the least shares.
And that's the issue - it makes initial equity split more likely to be
competitive or contentious when the stakes are likely to be very low or zero.

~~~
vessenes
My point exactly, two people who don't even know each other find it easy to
argue about unequal stake splitting. Actually, this is Joel's point. I merely
recapitulate. :)

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vessenes
This post is wrong. The central issue around equity splits is preserving
equanimity and founder happiness as long as possible, in as wide a variety of
situations as possible.

That is the fundamental purpose of a co-founder equity split in fact -- to
allow founders to happily sacrifice and risk for corporate value building.

The niggly thises and thats this author suggest may be arguably fair day 1,
but they miss both the psychology of nerd co-founders (or a nerd and a
business guy), and they take absolutely nothing about the future into account.

Anyway, if this works for you and your team great, but I would bet 10:1 that
with Joel's rules, the amount of time you spend fighting about equity in your
first year is close to zero, definitely measured in hours.

With these rules, you will probably spend that long agreeing how much each of
the multipliers is worth day two of your new startup, not to mention re-
jiggering when some low-percentage (by this setup) co-founder has the actual
big idea that gets you launched.

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grandalf
This contradicts advice I've been given by lawyers in silicon valley who
specialize in putting together large deals with startups.

Unequal ownership signals that there are known fault lines that may get ugly
later. Whose ego is so large that they insist on having 55% vs 50% of a new
venture they are starting with a co-founder they respect?

The formula in this article would seem to be the sort of thing that would
sometimes seem to have been a good idea (in retrospect) but would rarely help
to align everyone's incentives.

Why would any full time founder accept part time participation from a co-
founder? Very simple -- it's a funding strategy, not an indication of the part
timer's level of commitment. If starting off as part time is what it takes to
bootstrap through the an angel round, then there is likely a great eagerness
on the part of the part timer to quit his day job and become full time.

As a founder, be aware of those who want to stroke your ego. All the nonsense
in that article about CEO deserving more, etc., seems designed to stroke egos
and lead to the founders doing whatever the lawyers tell them.

~~~
martinkallstrom
Great point. Thanks for sharing this.

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brudgers
Shapiro's inclusion of Microsoft's founders is interesting because recently
Paul Allen has described the host of problems unequal division of equity
caused [<http://news.ycombinator.com/item?id=2386908>]. It's hard to argue
against Microsoft's success, but then again it is hard to argue against
Google's founder split either.

Shapiro makes a good point about not avoiding tough decisions, on the other
hand, Spolsky's approach avoids picking a fight unnecessarily - just as not
trusting the CEO to run the company is a mistake, likewise if a person's
biggest concern on day one is who owns how much of something worthless in
terms of dollars you probably have selected the wrong cofounder as well.

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randall
I think this is pretty much bullshit. The only part I agree with is full-time
status... but that's a no brainer. The rest are "pretend realities." There's
no reason why a CEO should get more, nor the person who came up with the
idea... and the article doesn't have any more convincing an argument than
"market realities."

As for reputation, it depends. I do think having someone who's a "name" as a
cofounder is helpful, but does that "name" actually mean anything? I guess it
could if you refer to the equity equation.

<http://www.paulgraham.com/equity.html>

Still, I think going for the "married couple" approach of as close to equal as
possible makes sense. Finding an equal cofounder seems crucial.

~~~
danshapiro
Perhaps market realities aren't convincing to you, but they're quite real.
Capable CEOs demand much more equity than capable CTOs in the market.

[http://onstartups.com/tabid/3339/bid/66/Startup-Founder-
Comp...](http://onstartups.com/tabid/3339/bid/66/Startup-Founder-Compensation-
Useful-Results-From-A-Recent-Survey.aspx)

I believe a much smaller difference than this article is warranted, since most
of the equity is compensation for risk, but some reflection of market is
appropriate.

~~~
randall
I think the disconnect happens in "experienced startup land" where someone has
a proven track record, and "scrappy startup land" where it's just two folks
with a dream. I can't imagine scrappy startup founders ever having anything
but equal equity. There's no market for their services as a CEO, and the
founder that they're working with should probably be their best friend from
college / work / equiv.

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alain94040
I write extensively on this topic (<http://blog.fairsoftware.net>) and I
thought this article was pretty good. Of course, the formula provided can't be
taken too literally, but it helps.

I have a slightly more radical point of view regarding the CEO and control
issue. It's approximated by Joel and others when they discuss full-time vs
part-time, but those are only proxies for what is really going on among
founders. In my experience (meeting with more than 200 startup founders pre-
incorporation), there is ONE person carrying the entire project on their
shoulder, and one or more co-founders who are happy to follow. Rarely, I see
two equally driven founders. So my litmus test is: "if one of you were to drop
out, would the startup die?"

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pauldisneyiv
Reality: every group of founders is different.

There are no set of rules all startups should follow. There are however
guidelines that ought to be considered, and discussions that absolutely need
to be had.

If you believe in the concept, believe in the team, and believe it will be
successful, don't sacrifice all of that due to not getting an extra 5% you
believe is deserved.

Find what works for your team and build something incredible. Remember you
likely are not capable of doing this on your own.

------
rdl
The only generally applicable rule I have is that the founder relationship is
ideally viewed as a long term and ideally repeatable relationship. If you
leave anyone feeling screwed, it probably is a lose; you negotiate much harder
and win-lose for a one time purchase with a stranger than with people you will
be doing business with long term, especially people who need to be
intrinsically motivated.

I think the same applies to employee salaries; negotiating someone down into
taking a much lower salary than necessity is 10k sound and 10m foolish.

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Gaussian
Save the pedantry for execution, not micro-managing equity splits. To me, job
No. 1 is keeping your small team happy, united and focused. I don't think you
maintain the camaraderie necessary when you're tossing 5% and 20% bones to
people who did this vs. those who did that. IMO, people who come in at roughly
the same time should get the same stake, assuming they're equally focused on
the task.

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ookblah
I'd be curious to see if there are stats on failed companies vs. the equity
split.

At times when I read these articles a lot of it seems very anecdotal, and I'm
inclined to just be like "whatever the hell feels right" lol. I think the most
important thing to take away from this is to agree on terms, make it in
writing, and set everyone's expectations from the get go.

I mean come on, he has a bad experience, which he doesn't really even
elaborate why/if it's even related to a 50/50 split. Could it be that he and
his co-founder just didn't fit and they found out 6 months later? Would a
60/40 or whatever else split have mitigated that?

Perhaps I will eat my words in the future, but I'm equal split w/ my co-
founder and I feel like we have arguments every week, but we always strive to
resolve them and to move forward with what we feel is best. In my head I just
can't figure out how negotiating a "better split" would somehow help a
relationship.

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jheitzeb
In my view, decision-making authority shouldn't be based on percentage of
ownership, but rather on the context of the decision and the meritocracy of
ideas. The ultimate say should be assigned and the CEO should have ultimate
decision, but even then the "healthy" way to establish that isn't through a
mathematical forumla or a percent ownership, but rather through trust between
individuals and agreed-upon roles.

Decision stalemate (or more generally, just spending too much time squabbling
over every decision vs. spending time executing) can happen even when it's not
50/50. The key issue isn't equity stake but rather leadership, trust and
culture.

My personal view is that 62% of $0 is zero...so don't sweat the equity stakes
too much and instead focus on winning.

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wslh
I have a very different perspective/experience: in a new business (without
explicit domain experience) it's difficult to know what actions gives the
better company outcome. Sometimes a timely 8 hours of work and luck gives a
better result than weeks or even years.

So, it's important to know that everybody is in the same boat.

I can give you an example from my little experience: we invested in a
technology for two years with a team of 3 without any economic result
(although we believed in the importance of that specific technology). One day,
1.5 years later after we put on hold the work this technology is the core of
one of the products of a fortune 100 company.

So, it's difficult to estimate what founder work will give the best outcome in
advance.

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absconditus
Can we remove the editorializing from the headline?

~~~
jheitzeb
The "joel was wrong" was taken from the post, and was sortof half of the
article. That is why I added it. Didn't feel it was editorializing it

