
Splitting Equity Among Founders - ohitsdom
http://www.themacro.com/articles/2015/12/splitting-equity-among-founders/
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sctb
Previous discussion:
[https://news.ycombinator.com/item?id=10665113](https://news.ycombinator.com/item?id=10665113)

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rsp1984
In my opinion this should be taken with a grain of salt. There may be a little
bias too since YC obviously has an interest in the most stable of all
configurations for their startups, which is the 50/50 split (although it may
not be the most fair one).

 _I came up with the idea for the company_ Indeed a silly reason for
unevenness.

 _I started working n months before my co-founder_ IMO if n > 6 it's a valid
reason.

 _This is what we agreed to_ Well if it was a fair agreement among equals, why
not?

 _My co-founder took a salary for n months and I didn’t_ Again, for n larger
than a certain number IMO this is a perfectly valid reason not to split
equally.

 _I started working full time n months before my co-founder_ See above.

 _I am older /more experienced than my co-founder_ Silly reason to some
extent. All other things being equal a drastically more senior co-founder will
likely have more contribution to the startup.

 _I brought on my co-founder after raising n thousands of dollars_ If n > 100
I think it's a valid reason not to split equally.

 _I brought on my co-founder after launching my MVP_ Depends on what the MVP
is and how much traction it has.

 _We need someone to tie-break in the case of founder arguments_ That alone is
a silly argument.

Note: Edited for formatting

~~~
fragsworth
> I started working n months before my co-founder

For this one, the solution might be to vest n months earlier, but have the
same number of shares in the end.

~~~
curun1r
The other option would be to treat the time invested as part of the company's
seed and treat it separate from the founder's equity. So figure out a
relatively low salary, use it to convert the time spent to dollars and then
give an equivalent amount of shares based on the valuation when the seed
funding was raised. Give the other founders the option to invest money in the
company in lieu of time at the same terms.

I know this could result in one founder having more equity than the other(s),
but I don't see how this can be considered unfair to any of the founders.

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nostrademons
I'm curious about equity splits that are unequal, but not woefully lopsided,
eg. Microsoft's 66/33 split, YouTube's roughly 45/45/10 split, or Apple's
45/45/10\. Do they have similar problems? It seems like the 45/45/10 split
does - Ron Wayne left Apple, and Jawed Karim seems to have been a bit of a
loose cannon at YouTube (uploading all the copyrighted content) and hasn't
worked with the other YouTube founders since. But then - maybe those
partnerships would've foundered anyway? Reddit's equal split between it and
Infogami didn't really work out either. Are there any companies out there that
have succeeded with 60/40 or 65/35 splits, or 40/30/30 between 3 cofounders?

Honestly, looking at the history of startups, it seems like it really is
"growth solves all problems". Startups that have users who desperately want
them can survive single founders (PlentyOfFish, Instacart), a 90/10 equity
split (Netscape), one founder who screws the others out of equity (Facebook,
Microsoft), founders who barely know their cofounders (Parse, Dropbox),
founders who break the law (IBM, YouTube, Zenefits, Uber), founders who quit
(Apple), founders who bow out (Uber, EBay), all the way up to founders that
split shares equally and give a bunch of shares to professors & classmates
(Google).

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jasode
For Instagram, I believe cofounders Kevin Systrom owned 40% and Mike Krieger
owned 10%. After the Facebook acquisition for $1 billion, that turned into
~$400 million and ~$100 million respectively.

Did the unequal split hurt them before and after the Facebook acquisition ...
in ways that's not obvious to us?

(That's not a rhetorical question. I'm genuinely curious if the inequality led
to a suboptimal outcome... such as getting acquired for $5 billion by some
other company vs $1 billion by Facebook.)

~~~
birken
I wouldn't be surprised if the idea of grinding it out for another 4-5 years
to grow from $1B to a bigger potential outcome was a lot less exciting to the
person with 10% fully vested than it would be to the person with 40%.

Based on my personal experience and many others I know, if there is somebody
at the company with much more equity than everybody else, both philosophically
and practically, it is their company, not yours. So while during the phase of
vesting your shares it can make a lot of sense to be there, after you are
fully vested the draw is much less. Over time the company isn't going to
become any more "yours" and the people who own the majority of the equity have
massive incentives to replace you and figure it out.

This is really the only perk of being an employee over a founder is that you
can leave and it doesn't affect the company very much, whereas when founders
leave it generally casts a very negative shadow on the company. So employees
can go in for a 2-4 year shift whereas a founder needs to be prepared for a
7-10 year shift.

~~~
jasode
_> I wouldn't be surprised if the idea of grinding it out for another 4-5
years to grow from $1B to a bigger potential outcome was a lot less exciting
to the person with 10% fully vested than it would be to the person with 40%._

Your "grinding it out" phrase triggered another recollection about Facebook
itself. Facebook had unequal splits[1] and Mark Zuckerberg had more shares
than any of the other founders. I believe ownership was unequal in July 2006
when Yahoo offered to buy Facebook for $1 billion and Mark rejected the
offer.[2] I'm not familiar enough with the timeline to know if the cofounders
were still there and soldiered on after that point towards the 2012 IPO. Maybe
they had contempt for MZ about their smaller piece of the pie and left early.

[1] [http://whoownsfacebook.com/](http://whoownsfacebook.com/)

[2] [http://www.inc.com/allison-fass/peter-thiel-mark-
zuckerberg-...](http://www.inc.com/allison-fass/peter-thiel-mark-zuckerberg-
luck-day-facebook-turned-down-billion-dollars.html)

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lpolovets
A few additional notes:

1) Investors do look at equity splits. Or at least my fund does, and I assume
we're not an exception. I think uneven splits can be reasonable as long as
they're just. For example, I think Reid Hoffman had more equity in LinkedIn
than the rest of the large founding team combined, but that made a lot of
sense: he already had a great name in the Valley, he self-funded the business
for the first year, and so on. It would have been much harder to find a
substitute for him than for other founding team members (all of whom were
great in their own right).

2) I don't say "always" very often, but you should always have vesting.
Always. I've seen friends break up over equity issues because they didn't have
vesting. You don't necessarily have to do a 1-year cliff, but it should take
years for someone to accumulate 30% or 50% of a company.

3) If you're interested in advice on this topic, the book I always recommend
to people is The Founder's Dilemmas
([https://www.amazon.com/dp/B007AIXKUM/](https://www.amazon.com/dp/B007AIXKUM/)).
The author analyzed data on thousands of founding teams to come up with
practical advice for people who are starting companies. There's a chapter on
equity splits in the book.

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rublev
My buddy and I split everything down the middle. You either completely split
it or don't split it at all. If you don't agree to a total split you're going
to end up micro penny pinching. "Hey man do you wanna cover the Slack monthly
and I'll cover the GitHub?" doesn't work. We just determine what we need, run
the billing on a mutual business account and pay it off equally. We split all
profits and expenses.

Of course if there is a significant workload discrepancy this doesn't work,
this assumes equal work from both sides. Realistically you're not going to be
able to perfectly quantify workload %. As long as we put in relatively similar
hours on a consistent basis, we split it all.

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sjtgraham
What happens when a co-founder leaves the company post-investment before
having fully vested? Does the equity usually return to the other co-founders
or return to the company, effectively giving all shareholders (n.b. including
investors) a pro rata increase in ownership? If it's the latter, one must
question an investor's incentives in giving that advice, i.e. are they just
encouraging a structure that has the most probability of them ending up with
more ownership than they paid for? It's actually difficult to filter for bias
when your counterpart has diametrically opposed incentives.

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n00b101
From a recent Harvard Business Review article: "What do investors make of
teams that split the equity equally? Our data suggest that they are less than
thrilled. Even after statistically controlling for a lot of factors, our data
still suggest the same basic message: companies that have equal splits have
more difficulty raising outside finance, especially venture capital." [1]

[1] [https://hbr.org/2016/02/the-very-first-mistake-most-
startup-...](https://hbr.org/2016/02/the-very-first-mistake-most-startup-
founders-make)

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lettergram
I have a strange counter point..

I am married, I started a company with my wife after I put about a year into
the product. Technically, we split it 65(me)/35(her) from a company
perspective. We came to these terms based on what each person brought to the
table.

On the other hand, now that we are married we do actually "go to war" together
and have only joint accounts.

The mutual success and splitting everything evenly worked well for marriage.
But it honestly made no difference for the company. We both work hard, we both
enjoy the challenge, but in the end thats now what the equity split was about.

The equity split (to us) meant who had more assets (time, money, explerience,
etc) to bring to the table. We wanted just compensation, and we felt it was/is
fair. I think that's the only "fair" way to do it. I'm not going to marry my
co-founders (at least not any more), so it should just be based on trade.

On the other hand, if you're just starting off and plan to work equally hard,
50/50 would be fair.

Giving arbitrary rules for every situation seems like a bad time.

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swalsh
Doing a startup with a spouse sounds like a dangerous situation on 2 levels, 1
you're crossing streams. A bad day at work can lead to a bad day home or vice-
versa. The second is you're no longer diversified. If you go bust, you don't
just lose 1 income stream, you're down 2.

There's a third point related to the first. If your business expands, and you
bring in another decision maker on any level it creates an unfair power
dynamic. You have 2 motivations instead of only 1 professional. You may
disagree with your wife on a critical decision, and you may be right, but it
may behoove you not to dig in your fists to keep your home life happy.

~~~
lettergram
I agree with all three in general, but disagree for this situation.

How many small business owners run a family business? How many farms are
family owned?

Historically, almost all ventures were taken as a family. From 10,000 years
ago until about 75 years ago.

All that being said, there is a clear definition of who does what and those
streams don't cross.

As for the power dynamic, to be honest it has impacted our ability to get
funding. Although, I think personally it should be the reverse. As you pointed
out, we live and die by this. Which means our incentives are more aligned than
ever.

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inpulse
The listed reasons all seem make a lot of sense, but why would they apply only
to founders, and not to first employees? Especially so when first funding
today often arrives before any product is even built.

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terravion
Equal splits make a lot of sense. If I had it to do over though, I think I
would make vesting more reflective of the 7-10 horizon than the standard. Only
problem with that is that it can create weird incentives to people who come
later in the cap table.

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madelinecameron
Oh god.

I think insane vesting schedules are terrible. Let's not make 10-year vesting
schedules.

[https://zachholman.com/posts/the-new-10-year-vesting-
schedul...](https://zachholman.com/posts/the-new-10-year-vesting-schedule)

~~~
terravion
Why do you think that being the boat for the length of time to create the
value is insane? As the continuing founder in a start-up, I'm pretty sensitive
to the idea that the reward is at the end of the marathon. Why would splitting
based on a marathon-length rather than a 5k race be insane if what you think
you're doing is marathon running?

~~~
madelinecameron
I just don't think value is only delivered over a 10 year period. It should
take a decade (or 7 years) to get your initial 'reward'.

It doesn't make sense to be locked into something for a decade that may not
even be the same in a decade. Just personal preference though, maybe someone
will be up for decade of vesting.

~~~
runesoerensen
_> I just don't think value is only delivered over a 10 year period. It should
take a decade (or 7 years) to get your initial 'reward'._

I'm assuming you meant "shouldn't", but that's not what a 10-year vesting
schedule would mean either (all other things being equal); With a one-year
cliff you'd receive your "initial reward" (i.e. fully vested equity) by the
end of the first year, then continue to vest on a monthly/quarterly/yearly
basis in accordance with the vesting schedule.

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elzr
I didn't understand the very last part:

> Another good contingency measure is for only the CEO to hold a board seat
> before a significant equity fundraise. That will prevent board disputes
> during tough decisions, such as in the unlikely event that the CEO has to
> fire a co-founder.

Can someone please unfurl what this means? Is it arguing for the founders NOT
to have a board seat before significant equity changes so that the CEO can be
the arbiter betwen them? (Btw, it's odd to assume the CEO is not a founder).

~~~
mattangriffel
No, it's a way of dealing with the issue of deadlocked decisions between co-
founders if equity is split evenly.

Usually in the case of a deadlocked decision between co-founders, you can
resort to a board vote, after which you resort to a vote among shareholders.

If, say, two co-founders split equity and they're both on the board, then a
disagreement could lead to a problem. If, however, only one of them (usually
the CEO) is on the board, then there's no deadlock there.

Sometimes people recommend giving one co-founder (again, usually the CEO) one
extra share so their vote can break a deadlock. But putting only the CEO on a
board is another way to deal with that problem without having to worry about
extra shares.

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ta08152016
Had to create a throwaway account for this one. I was involved in a founder
split that was wildly uneven years ago. The justification sounded good that
the beginning, but the imbalance became more and more evident as things went
on. Ultimately, one co-founder left, one was bitter all the time, and one
ended up with a significantly disproportionate share of the company. It just
didn't work at all. Seibel is right here, start with equal shares, and only
modify if there is a significant imbalance. All the justifications you can
come up with at the beginning of a company just aren't able to take into
account what will happen 7-10 years from then. Keep it fair, or you risk
introducing a whole load of extra baggage to an already impossible task, right
at the beginning.

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jomamaxx
I agree with the 'it's all ahead of you bit'.

BUT - what if someone spent a year or more making a product, got it to MVP,
and then took a couple of others on pre-funding.

Most of the vision, concept, and maybe even the trickiest might possibly have
been done ...

I wonder what his thoughts are on that ...

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terravion
Then maybe the people that come on at that point aren't actually founders,
they're highly equity compensated employees and YC has a whole different set
of advice. It is okay to be solo founder, you just need to know that you need
to build a team.

~~~
Kinnard
Part of the issue is that the delineation isn't clear, in life or in startup
advice.

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madelinecameron
I guess it makes sense that if you object to having nearly, if not completely,
equal equity splits, you shouldn't work together.

If you aren't willing to give significant equity, they either aren't valuable
enough or you don't see them as crucial.

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brightball
I will say that years ago in grad school I went over-fair on the equity split
of a startup I was attempting with 40-30-30. Our last big potential investor
walked because he wasn't comfortable investing in any setup in which 1 person
couldn't make the hard decisions if they had to. My co-founders weren't
comfortable with that.

Now we all have jobs. :-)

One of these days I need to write about that startup. It was 03-04 and just
the differences in technology at the time that led to some of our
architectural decisions are mind-boggling.

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bachback
The point of giving someone equity is that you can't pay others with cash,
assuming you have the choice. If you have the choice it might well be you
would rather start the company alone. There is a very interesting dynamic
between the point of some participant being a founder and being an employee -
late founders and early employees can be very similar to each other. Assuming
a business is already generating revenue of even profit, the dynamic changes.

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ginger123
Splitting equity equally is a terrible idea, to use an old quote "Too many
Caesars is not good". In any organization there has to be a one leader who is
accountable. In case of the startups mostly likely that person is going to be
the majority shareholder, splitting equally creates a rule by committee style
of management, which is a terrible way to manage a company or country. Ask the
Soveits if you don't agree.

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wuschel
IMHO this is a very individual matter. An uneven split among founders should
not be red light, as long as it is in the same magnitude.

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Kinnard
I'm surprised YC hasn't explored Dynamic Equity Splits at all:

[https://techcrunch.com/2013/02/09/the-perfect-cap-
table/](https://techcrunch.com/2013/02/09/the-perfect-cap-table/)

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question081516
Any advice on clearing up an unequal equity split down the line? What are some
ways to rebound from these pitfalls if founders realize, post-investment, that
an initial mistake was made?

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Kinnard
I really doubt one-size fits all advice is appropriate here.

