49/51 vs 50/50 Equity Split


10

What are the advantages and disadvantages of dividing equity 49/51 vs 50/50 between partners?

Edit: 51/49 feels wrong, but there may be some startup cases where it is good if you are the majority stakeholder. E.g. when you want to sell the business or when there is a tie over disputes. I am sure there are better ways of resolving this than with 1% leaning one way or another, and I am interested in hearing all of them.

I am also interested in any real-world "gone bad" or "saved the business" experiences.

Equity Partnerships

asked Apr 21 '11 at 07:56
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Pate
306 points
  • It may be not completely related to your question, but i love Apple's approach, when they started, of having 2 + 1 partners (45/45/10). The 3rd one could be someone more mature/experienced and could help in disputes, "diplomacy" and "supervision". – Rui 8 years ago
  • @Rui, I like that approach. However, you would need to pick your 3rd partner wisely and objectively. – Pate 8 years ago
  • possible duplicate of [Forming a new software startup, how do I allocate ownership fairly?](http://www.brightjourney.com/q/forming-new-software-startup-allocate-ownership-fairly) – Brandon King 8 years ago

1 Answer


7

In short...

50:50 indicates the founders want to retain some reasonable chance of staying friends with a good working relationship.

51:49 indicates that one or other needs to be in control and it will end messily.

Distributing equity is as much about feeling fair as being fair, so fighting for a minor difference is really not worth the effort when (not if) something goes wrong.

For the canonical post on this subject, see Joel's answer to a question on allocating ownership fairly.

You revised to ask for personal experience, which I have of exactly this. I'm not going to pour out the full messy story, but in short it is far too easy for the majority holder to pull rank in the inevitable heated row about (trivial technical detail that doesn't matter at all / marketing strategy / pricing / insert trivial topic for heated disagreement here). The next day there will be apologies all round, but that emphasis of imbalance spoils the vibe from the first moment it's triggered. There were other things in that tale, of course, but much stemmed from the majority/minority and its' use.

"I must be CEO of course" "I'll have 51, you'll get 49" are now personal red flags 30 feet high, illuminated by floodlights.

As an alternative, particularly if you are of a similar background or skillset I much prefer a three way split - which could be 33/33/33 or 40/40/20 as suits, and depending on the level of involvement. Someone more mature who can knock the children's heads together from time to time. Perhaps someone with a more business or sales background rather than yet another techie.

I can't emphasise this enough, but there is something about the dynamic of three as opposed to two that leads to much more pleasing ways of playing with others - and less taking the ball to run home.

Lastly, if you're tempted to say "it wont happen" It will that's guaranteed. You'll disagree on a lot of stuff - how you handle it, and how you're set up to handle it could make all the difference!

answered Apr 21 '11 at 08:13
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Matt
2,552 points
  • Thanks, I read Joel's take on this and agree wholeheartedly. Can you cite any examples that "ended messily" due to this? It's not really about the 1% in income, but about veto'ing the big votes. – Pate 8 years ago
  • @FreshCode I'll make an edit to reflect your revised question, in a moment, but yes I have personal experience of being an minority (!!) "equal" partner with someone who had to be CEO. I've learnt. Wish I'd not tried the business and kept the friendship to be honest! My **preferred** organisation with two equal partners is to find a "wise uncle" type to be the third. Doesn't have to have as much involvement or similar domain knowledge, but should bring something to the table. There's something about the dynamic of three as opposed to two. – Matt 8 years ago
  • thanks for clarifying. That's the second vote for having a 3rd "wise partner". Seems like a great idea. – Pate 8 years ago
  • Big +1 for the "30 feet high red warning flag, it will end messy" tone. A side note, if the two partners aren't 100% sure about the partnership, they should take 50/50 with identical vesting. Vesting can help simplify lots of otherwise really nasty partnership issues. – Jesper Mortensen 8 years ago

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Equity Partnerships