
Splitting Equity Among Founders - tilt
http://themacro.com/articles/2015/12/splitting-equity-among-founders/
======
tptacek
This is the only way I'd ever consider doing a startup again. It's important
that you get _both parts_ right: the equal split _and the vesting schedule_.
Run, don't walk, from startup teams that want to operate without vesting.

~~~
brianwawok
You think 1 year cliff is always right? I think a cliff can be an easy path to
abuse.

~~~
tptacek
Yes. If you can't trust your team not to abuse the vesting cliff, you can't
trust them to be cofounders.

It is hard to imagine a scenario with a normal (<=4) number of cofounders
where it is reasonable to let someone who spends less than a year on the
project to walk away with as much as 6% of the company. Having just wrapped up
a 10 year company, it is honestly hard to imagine it being fair for that
person to walk away with 1%.

~~~
shostack
Not to diminish the importance of trusting founders, but what are some
approaches to remove the need for trust in solving for this?

As a fan of the saying "trust but verify" and its derivations, while I feel
trust is important, I hate leaving such critical things up to trust at the end
of the day.

~~~
brianwawok
One interesting thing to look at is the possible losses via a little game
theory.

No Cliff - Risk is that one founder sucks for a year and then takes some
equity (2, 3%? How much vested in the first year anyway). If company goes for
billions, you make a few million less - basically a rounding error.

Cliff - Risk is the controlling founder fires the non-controlling founder on
day 364, but company still goes on to succeed. Loss is the non-controlling
founder loses a year of his life where he worked for equity that was stripped
from him.

~~~
tptacek
First, 2% is a lot. It's more than any senior employee is likely to get after
year 1-2.

Second, if you're doing equal split and you have three cofounders, without a
cliff you're talking about someone who might walk away with 8% of the company
without even having spent a year there. CEOs of companies routinely get
significantly less than 8% of the company.

Finally, the "no cliff" risk happens _all the time_. People leaving after less
than a year is practically the default setting. I'm sorry, but as often as
malfeasance among founders happens (the fact that it's newsworthy when it does
is suggestive), it's not the default.

~~~
s73v3r
I think the outcome where someone gets fired just before the vesting period is
far, far, far worse and more damaging that someone getting a small chunk of
the company for not doing anything.

~~~
tptacek
You're answering a question nobody posed. The question is, what's more likely
to happen: a cofounder leaving in less than a year, or a cofounder being
deliberately screwed by all their cofounders and fired ruthlessly just before
the cliff.

The answer is: the former scenario is far more likely than the latter.

~~~
s73v3r
I don't think it matters which one is more likely to happen, rather, which one
would be more devastating. And quite frankly, in the case where a cofounder
left in less than a year, nobody else has really lost a lot.

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cperciva
While the conclusion -- co-founders should get equal shares -- seems generally
reasonable to me, in a sense it's just punting the question. In the following
cases

    
    
        I started work­ing n months be­fore my co-founder
        I started work­ing full time n months be­fore my co-founder
        I brought on my co-founder after rais­ing n thou­sands of dol­lars
        I brought on my co-founder after launch­ing my MVP
    

how do you decide if a company has two co-founders or one founder and one
early employee?

~~~
exelius
IMO the distinction between "founder" and any executive-level hire before your
B round are largely meaningless.

You should know pretty early on what roles your core leadership team needs to
have. You should set aside equity for those roles as if they were founders --
especially for senior people, who are often giving up a lot in salary to work
for a startup. You're obviously not going to give founder equity to a CS grad
fresh out of college, but maybe you should for say, your head of customer
relations (if customer service is a strategic driver for you, of course). You
should especially give founder equity to anyone whose job is to establish a
department from nothing.

And does it really matter in the end anyway? If your company fails, your
equity is worth $0 no matter how much you have. If your company is the next
Google, then you're all going to be so rich it won't matter. But I would much
rather have leadership who is heavily invested in the success of the company
than someone who is just going to bolt to start his own company after 2 years
because its obvious he's not going to get a million-dollar payday.

That said, you still have to protect your equity (liquidation preferences,
vesting schedules, etc). But the focus on one founder or another's role is
usually meaningless: your leadership team works as a team. If you have weak
links, it should be easy to get consensus around a buyout or contract
renegotiation.

~~~
cperciva
_If your company fails, your equity is worth $0 no matter how much you have.
If your company is the next Google, then you 're all going to be so rich it
won't matter._

You sound like a VC. While some investors might not care about any exit
smaller than Google, let me assure you that there are plenty of companies
which are worth more than $0 but less than $23B; if a company is acquired for
$5M, there's a big difference between owning 5% and owning 50%.

~~~
exelius
If a VC-funded company is acquired for $5M, the founders likely aren't getting
anything - liquidation preferences from angel/seed and A round would likely
wipe them out almost entirely.

Equity in an early company is 100% based on potential. Why should the guy who
filed the paperwork and found an investor claim all the equity for a company
he has not yet built? What about the efforts of the other employees (who will
probably end up doing just as much for the company)? Unless you're paying them
an above-market salary, don't they have some right to the company they helped
build?

~~~
cperciva
When did I say anything about being VC-funded? There are plenty of us who
bootstrap companies into that range.

As patio11 commented recently: "There appears to be a liquid market for
businesses which are profitable. That is a Tokyo word. Means 'makes money'"

------
jdoliner
Regarding: "I started work­ing n months be­fore my co-founder"

A really good way to handle this is with vesting, which is something every
company should have. Normally stock vests as you spend more time at the
company, in my opinion it's totally fair for cofounders to have equal stock
allocations but if one founder was working for 6 months before the other
joined they should be 6 months ahead on their vesting.

~~~
brudgers
My concern is that an accelerated vesting schedule for one founder versus the
other only matters in one particular case and that case is a bad one: the
founder with accelerated equity decides to cease working and become a passive
owner.

In any other circumstance, the "earlier" founder and the "later" founder have
aligned interests in regard to equity independent of vesting schedule. An
"earlier" founder insistent on more aggressive vesting may be symptomatic of
an underlying poor relationship.

That's not to say that there couldn't be circumstances in which two founders
_naturally_ have different vesting schedules, e.g. the "earlier" founder
incorporated the final entity prior to the "later" founder's involvement. But
from a formal standpoint, if both founders are there the day of incorporation,
then that's where the clock starts.

------
logfromblammo
The two infographic images attached to the article completely failed to
elucidate.

Two red dots, and some blue and green squares, followed by a blue and green
pie chart. This is followed by the same two red dots with more blue squares.

It sort of reminds me of the occasional articles you see about particularly
egregious elementary school support materials. _If Suzie muttonates half her
mickmackles, how many glomploots will Bobby need for the spimbliz?_ _Wakalixes
make it go!_

The point was that you shouldn't divvy up equity based on work already
completed, because that split does not represent the division of labor in the
work that is still necessary to get to a viable product. Here's how I would
illustrate that:

Image 1: A person in a red shirt holds a red apple. A person in a green shirt
holds a green apple.

Image 2: A bushel basket holds 18 red apples and 2 green apples.

Image 3: An apple-pie chart made from the very first bushel represents an
equity split of 90% to redguy and 10% to greenguy.

Image 4: A wider shot of their orchard shows two trees with red apples on it,
and 8 trees with green apples, still to be harvested.

------
colmvp
I've personally never worked with an engineer who thought that I as a person
who would do UI/UX/front-end code deserved equal amount of equity as him as
the other co-founder (backend engineer). And in all fairness, you can execute
a shitty looking designed product with functionally that works and gains
traction.

~~~
exelius
Sucks to be them; UI/UX guys are way more in-demand than back-end developers.
The skill set is also way closer to the up-front product design that
makes/breaks your company than back-end work is.

~~~
dennisgorelik
Different skills are valued differently for different startups.

For Google - backend skills were way more important than UI.

For Instagram - UI/UX.

------
gsibble
I think part of the confusion here is what determines the difference between a
founder and an employee. Are there two founders? Three? Five? Seven? When did
they all start working? Are they all working full time? Are they all taking a
salary? Not to mention that you can't just grant equity out of thin air once a
company has been founded. There are tax implications, especially after you've
raised money. I can't imagine telling an investor that they're going to get
significantly diluted because I have a new founder that needs 20% of the
company because "all founders get the same share".

If you were all there together at the inception of the company and all agree
to work fulltime on the project and can contribute equally than it makes sense
to split up the equity equally. But just saying "everyone should get the same
share" seems to simplify things a bit much.

~~~
tptacek
As you say, the simple (and common) case is that everyone starts working in
earnest on the company at roughly the same time, and equity split is a no-
brainer.

A very common set of cases that is only slightly more complicated than this is
the one where everyone in reality has started working in earnest on the
company at approximately the same time, but for whatever reason, one of the
team members feels that some work they did prior to starting the company with
their partners also counts as "earnest work". Most of the point of this
article is that you shouldn't complicate your company by accepting that
argument; you will regret it down the road.

The next most common set of cases is that "cofounder" status is used as a
recruiting tool. The company really wants to work with a particular person,
but that person doesn't want an employee role. This can happen months or even
years after the company has been founded. The simple answer here is that a
cofounder is whoever the existing cofounders say is one. I personally think
you're better off keeping things simple: if you call someone a cofounder, give
them an equal share of the equity. If the road ahead doesn't have enough
opportunity for a new cofounder to contribute so much that they'll earn the
share, don't call them a cofounder.

After that, you're on your own.

------
maxcan
> My co-founder took a salary for n months and I didn’t

This shouldn't be ignored however. If one founder has more immediate liquidity
needs than the other, the non-salary-taking founder should receive some
compensatory benefit for leaving cash in the company. The way that I like to
resolve this is for the non-taking founder to essentially be paid in
convertible notes or some other form of equity for the salary that they are
giving up. In other words, founders split the initial equity pie equally, but
then have the option of receiving cash, notes, or some mixture.

If I can figure out how to make interpolated equity work from a tax
perspective, that would be the optimal solution. [https://medium.com/this-
time-is-different/interpolated-equit...](https://medium.com/this-time-is-
different/interpolated-equity-12ddebcc63ef)

~~~
tptacek
Don't use equity to pay back cash from founders. Just use IOUs. Like Joel
Spolsky says: _don 't resolve problems between founders with shares_.

~~~
maxcan
promissory notes work too. The problem that I have is that because of the
credit risk in getting paid back, unless there is a very high interest rate,
they massively undervalue the investment on forgone salary. If there is a high
interest rate, institutional investors get pissed off.

------
tzm
I co-founded a company with a small team that struggled with calculating
equity splits. It was a painful process that involved a Google spreadsheet, a
list of individual contributions, personal experience, impact and job
function. Weights were applied.

The intent was to determine an objective calculation of each founder's equity
position. The process exposed some serious flaws, insecurities and heated
discussions around the general efficacy of such an experiment. It felt petty
and rather naive.

I left the team out of principle, but helped close the round and became an
advisor.

My general rule is start at equal positions and apply reasonable adjustments
based on hard contributions (ie, financial, etc). Building a company is a
process that will be redefined as you go. However, the team dynamic shouldn't.
If the team cannot grasp this concept, then leave.

------
lmartel
My favorite solution to the "I started n months before my cofounders" problem
is to write an IOU from the company to the person for the work they've already
done at some significant but less-than-1 fraction of their typical monthly
rate, say 50% or 70%.

This allows the founding team to acknowledge the extra work without creating
an uneven equity split.

~~~
tptacek
Yuck, what a mess. My monthly rate is absurdly high, because for the last 10
years I've chosen to work primarily for companies that will get a lot of value
out of working with me. The fact that I've done security work for big
financial firms doesn't mean my work is that valuable to the startup _relative
to what all the other founders are getting_ , but my resume anchors my rate
there.

If you're finding it important to draw these kinds of lines between founding
team members, that's a sign that you might not have the right founding team
members. A founding team that "clicks" and works together is _incredibly_
valuable, probably far more valuable than any year's worth of billing you've
ever done. Don't mess it up with stuff like this; it's just not worth it.

Man, I am even more procrastinatey than normal today.

------
humbertomn
The text could include more info on vesting schedules and some examples. It's
surprising how many professionals still never heard of vesting schedules when
joining a startup (specially outside the US), and as influential as YC is, I
bet a good explanation there would be very helpful. "Vesting or no company at
all :)"

~~~
tptacek
Your lawyer is going to set up your vesting schedule for you, so all you
really need to know is "four year vesting, one year cliff, vesting monthly
after the cliff".

------
purplerabbit
What if one founder supplies the idea, but has no technical or business
ability? What cut would that be worth?

~~~
zxcvvcxz
Then you shouldn't be working with them...

~~~
seansmccullough
Ya, they aren't adding any value. Anyone can just come up with an idea.

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billcao
"After the one year point you get 25% of your stock. Every month after that
you get an ad­di­tional 1/36th of your total stock."

Shouldn't 1/36th be 1/48th? Because 25% has already been vested at the 1 year
mark, i.e. 36*(1/48) + 25% = 1 = total stock.

------
tshiran
Unless there's a really good reason to not split it equal, I think it's better
if both founders have the same amount of equity. Otherwise you could create
unnecessary tension which is the last thing you want at that early stage.

------
natmaster
The big takeaway for me is the last sentence, "If you aren’t willing to give
your partner an equal share, then perhaps you are choosing the wrong partner."

------
danieltillett
One thing I don't understand is if a startup is a 10 year journey why vesting
is a 4 year journey? Is there some tax reason for this?

~~~
tptacek
It's just a norm. Companies sometimes make additional retention grants to
fully vested employees.

~~~
danieltillett
Well it is a norm that does not seem that logical. If you want the founders to
be in it for the long haul then it would make more sense to have a vesting
period over a longer time.

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elliotoco
How about being a solo founder? What argument(s) would you put forth to
dissuade someone from doing that?

~~~
tptacek
This has been talked to death on HN already:

[https://hn.algolia.com/?query=solo%20founder&sort=byPopulari...](https://hn.algolia.com/?query=solo%20founder&sort=byPopularity&prefix&page=0&dateRange=all&type=story)

------
runesoerensen
Also submitted here:

[https://news.ycombinator.com/item?id=10665306](https://news.ycombinator.com/item?id=10665306)

[https://news.ycombinator.com/item?id=10665034](https://news.ycombinator.com/item?id=10665034)

Should probably be merged, and themacro.com might benefit from redirecting to
the canonical URL :-)

~~~
dang
We merged them. Sorry your earlier submission lost out. We're working on an
approach to duplicates that will make it less of a lottery.

~~~
runesoerensen
Ok great, and no worries :-)

