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.
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%.
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.
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.
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.
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.
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.
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.
The situations I can imagine involve doing what is right in the strong sense of "what is right" The obvious cases are when circumstances beyond normal business operations are behind the person's leaving...knicked by a bus, serious illness, etc.
The less obvious circumstances would be a case where the person leaving is for the good of the company and acknowledged all around, e.g. it turns out that two good people can't get along and so one or the other leaving increases the odds of success, and leaving quickly and cleanly is in the interest of the company.
In both cases, the person leaving with some ownership expresses the underlying trust and without their ownership, their never really was any trust.
Yet in the end, its business. Whatever gets written down, is what is enforceable. Fairness is an odd notion, with maybe little importance to contracts.
I've witnessed anger/frustration in 2-3 year old companies where one founder 'checked out' early. E.g. a college professor was offered a large share, for expert consulting privileges. Their expertise was perceived to have a large value to the new company.
After a year or two it became obvious who was getting the better deal. But too late for regrets - the prof still owns a small fraction of the company.
Speaking as a founder who is putting both sweat and cash equity into their company: run, don't walk, from cofounders that demand not to have a cliff. You might not end up regretting giving someone a pass on their vesting cliff, but if you do regret it, you will regret it a lot.
If you're part of a founding team and you put cash in, get IOUs, and take cash back out later.
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?
If you start working 6 months before your cofounder, the simplest thing to do is just to give everyone equal shares and the same vesting schedule, but if you want to be tricky about it (you shouldn't), just set the earlier founder's vesting schedule forward a bit.
My take is that there's no such thing as a part-time founder, but if you really want to allow someone to be a founder while they have a full-time job elsewhere, just do the opposite thing: don't start their vesting until they're full time.
If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee.
Launching your MVP shouldn't have much to do with whether someone is or isn't a co-founder. If your MVP is fabulously successful and de-risks the project, don't bring on a co-founder; bring on an early employee. If it isn't successful, ignore it in equity calculations.
> If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee.
I disagree; not everyone who's qualified to be a founder is able to forego salary. It's a big problem right now; otherwise awesome prospective founders have to be lured away from $150-200k/yr jobs - and that's really hard if your salary offer is $0. It's a lot easier if you're offering $100k - it's not their market value, but it also allows them to more or less maintain their lifestyle.
"Founder" isn't a qualification. It's a super-common trap to think that it is; thinking that implies that you can see into the future and map someone's resume to their impact on the company. You can do that only in the vaguest possible terms.
Joel Spolsky covered all of this in his guide to equity, which is like a more detailed version of Siebel's post. If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue.
If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue.
Would you allow co-founders to invest in their own company on the same terms as angel investors? If no, why not? If yes, how is this not equivalent to giving the salary-taking co-founder less equity?
So I'm writing a lot here because I'm procrastinating finishing a fake Phrack article I'm publishing later today to announce the Starfighter CTF, and we should get opinions from other people besides me.
But having said that: it's probably situational. If all the cofounders have roughly equivalent finances, maybe that's OK. But if some of them have, for instance, just sold a company, and the others are doing their first no-salary startup, it doesn't seem fair to allow the better-off ones to buy additional influence.
I'm using "fair" here as a shorthand for "things that will damage the incredibly valuable cofounder relationship more than it's worth".
I dislike that approach (maybe because I'm one of those guys without a trust fund who could never work for a startup without a salary). "Living expenses" are often far more than that for someone in their 30s: mortgage, student loans, car payment, etc.
Right now, founding a startup is overwhelmingly for people from privileged backgrounds who can afford to be bold and work for no money because they have a safety net (parents, trust fund, etc) they can rely on if they fail. It sucks. There's a reason there are hundreds of food delivery startups every year: the only people with the ability to start companies don't have enough experience with the world to know what would even make a good company. Sometimes they stumble onto something wonderful, but most of the time they just fail, go live with their parents for a few months, then go start up something else. Repeat until they get tired and just get a 9-5 job at Google or Facebook.
Every individual has a market value. If I make $200k/yr right now, and I get an offer to work for a startup where I would make $100k/yr, how is it fair that someone who previously made $75k/yr gets the same amount of equity as me? After all, I'm giving up $100k/yr just to work here! It's better to ask someone "what would it take to get you to work here?" and pay them that. Then give them equity as an incentive to be successful.
I know the Silicon Valley hegemony is against talking about money like this, but people definitely think it.
Employees get a reasonable fascimile of a market salary and the perks commonly afforded employees in your region/industry with probability equivalent to the sun rising in the morning, as of day one, for every payroll period until they're formally separated from the company. If this describes someone's situation, they're an employee. If not, they're probably a co-founder (or being horrifically exploited).
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.
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%.
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?
This is contrary to my own experience. Executives hired after an A round but before a B round can have wildly different incentives than a true owner does.
If you set the vesting schedule properly, they shouldn't. But given how easy it still is to get A round money, and how most of the work of building a competitive advantage happens between A and C rounds, IMO you have to compensate them like founders if you expect them to build your company.
Have the people you meet at parties or networking events heard of your company yet? If not, it's two co-founders.
Pithy sayings aside, the point of the article is to be forward-looking with equity splits. All of the reasons you list are rearward-looking: they're about things that have happened in the past. The article assumes that you want your company to be much bigger in the future and that most of the work is ahead of you, which is generally YC's investment thesis. If you're happy where you are, you could easily substitute employees for founders, but they will never be as motivated as someone with a big equity stake.
In the context of startups that flow through YC, all founders are employees. The startups are Delaware C Corporations. Corporations are required to pay the people who work at them at least the statutory minimum wage. There's no exemption for owners. And there's significant liability for a company that skirts the law and later becomes successful [for some definition of "successful"].
To put it another way, all those items may matter for a small business organized in another way. But a C-corp is legally a "person" separate from it's owners, officers, and employees.
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.
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.
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.
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.
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.
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.
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.
> 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.
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.
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.
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.
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.
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 :)"
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".
Scintillating conversations are worth buying the dinner you have them over. Shares get issued for doing lots of work for a period of years. Founders with quote no business or technical ability endquote who nonetheless are capable of value-producing work exist [+]; people who do not actually do work create no meaningful value and are not founders.
[+] Startups are basically all about people who are theoretically "unqualified" to do things repeatedly doing things they are unqualified to do.
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.
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."
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.
Also didn't -1, although I did downvote your personal snark toward rday's response.
There have been a number of recent posts moving in this direction, where prominent investors have argued that the line between founder and early employee is blurrier than most people think it is, and so employees should get more equity than they currently do, with fewer restrictions. See eg:
The current founder/employee divide is largely a relic of the days where, to build a tech startup, first you had to convince a bunch of investors to give you $10M and then you hired a team with that. In that system, the founders were the ones who convinced the investors, and the employees were the ones who were hired with investor money.
But capital requirements for startups have gone way down since then. Now, the logical divide is before vs. after product/market fit. If you join BPMF, you're a founder - sometimes (oftentimes?) the title and equity don't go along with that, but that's because there are a lot of suckers out there who don't actually know how the startup game works. If you join APMF, you're an employee. After all, a founder's entire job is to identify an unmet need in the marketplace and devise a strategy for solving it, and until you get PMF you haven't really done that.
The complication is that startups BPMF shouldn't be hiring at all, but few of them realize that, and even fewer of them can check their egos enough to realize that having people do your bidding won't actually help you find a viable business model faster, it just makes pivoting more difficult. There've been tweets from Sam Altman [1], comments from Paul Buchheit [2], essays from Paul Graham [3 - "If you went out and hired 15 people before you even knew what you were building, you've created a broken company."], and video interviews with Marc Andreesen that all say that, but still, a seemingly large fraction of entrepreneurs don't listen.
Edit: My snark isn't toward rday's response, but rather, to the hypothetical downmodder from rday's response. I should have been more clear.
I think the fallacy that is committed in any alternative scheme is assuming a fixed value for each individual for the life of the company.
Why not just set the bar right to begin with: everyone contributes as much value as they can, and we all share it. Consider an alternative: everyone contributes as much value as they can, but the dude who put in $5 20 years ago and doesn't even show up any more gets 10,000 more parts of every $1 I produce today.
>The complication is that startups BPMF shouldn't be hiring at all, but few of them realize that
It is curious that you state this as if there are BPMF startups. How does such a thing happen? A BPMF startup sounds more like a research center.
