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.
>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).
It seems this is what founders want too. If the goal is a big business and instability makes that less likely, I would optimize the equity split for effectiveness over fairness.
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.
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).
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.)
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.
>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) 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/). 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.
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.
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.
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]
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.
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.
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.
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.
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.
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?
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.
> 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.
Why does the initial grant have to be enough for the entirety of the company's growth? Why don't you just issue refresher grants to people who stick around?
> 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).
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.
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.
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.
more important if you can make revenue or not. "getting users" and getting revenue might be completely different things, and it seems to me YC was build mostly around the former, than the latter.
They talk about 'ramen profitable' meaning - squeaking by with enough money to pay basic bills and survive. I think this is great advice specifically because of how it empowers you vis-a-vis investors. It changes the game radically -> no 'desperation'.
But they also have this thing after YC 'time to profitability'. Seems they are big on that.
Frankly - despite bubble hype, there is something to be said for getting tons of users. If you have tons of users and a 'basic' type of revenue model you could apply that you know will work - even basic ads - then I think it makes sense.
LinkedIn, Twitter, WhatsApp, Instagram - so many just focused on getting tons of users and I think that their valuations were reasonable. An acquirer can roughly calculate how much each user is worth.
I think it depends on a lot on the type of business model.
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.
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.
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.
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?
