Is a 50/50 equity split without 50/50 control a doable and wise thing?


6

I've found a great partner for my second tech startup, and want to structure this one better than the first, which made money but eventually got ugly due to poor choices my younger self made along the way.

I've spent the last couple days reading everything I can find about 50/50 equity splits, and appreciate the passionate arguments for and against them.

My situation with my partner is that we both really do think a 50/50 equity split is equitable, and not just convenient. I tend, however, to think 50/50 control is a dangerous thing, and my partner agrees.

He not only claims to be perfectly comfortable with me having control, but was the first to throw that out as we began to structure this thing.

I've been unsuccessfully struggling to come up with a good way to do a more-than-50/less-than-50 split combined with some sort of bonus to him upon acquisition to even things up, or maybe even just contributing more cash than he to justify something like a 51/49 split.

My latest idea is to make the equity split truly 50/50, but tip the balance of power (which, again, he claims to be happy to give up) by making part of his stock non-voting, or part of mine super-voting, or something like that.

So, my question: is this doable and wise? Or, at least, somewhat wise? I can imagine super-voting stock being a distraction for potential investors, so maybe that's a poor idea. Perhaps some non-voting (non-founder?) stock would be less of a distraction?

tl;dr Thoughts on splitting equity 50/50 without splitting control 50/50 by giving one partner some stock that votes differently?

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asked Mar 29 '13 at 02:45
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Smarterthistime
31 points
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3 Answers


10

It is a common misconception of entrepreneurs that control flows from owning a majority of the stock.

Stock ownership and control are separate and independent.

Control is determined by the legal documents you draw up when you form the company. The most important documents are the company bylaws, which determine how the company operates, and the shareholder agreements, which are contracts between the shareholders agreeing to do certain things.

There are many ways of setting things up, but in typical US high-tech startups with good documents drawn up by competents lawyers who often practice in this field, you'll see something like this:

  • The CEO makes most decisions
  • Certain important decisions, like issuing new stock or selling the company, require approval of the board of directors
  • The shareholder's agreement includes a provision for who is on the board of directors

Whether you start with a 50/50 share split or a 90/10 share split, you can sign any shareholder's agreement you want about who is on the board of directors. You can agree that the board of directors consists of the founder, the founder's husband, and the founder's mother in law. You can agree that it consists of Howard Schultz, Jeff Bezos, and Bill Gates (if they agree to serve). Ultimately that's who controls the company. Sometimes the shareholder's agreement says something like "two seats of the board will be elected by the common shareholders, each voting their shares proportionally," and then the equity split will actually determine the control of the company, but it is actually the exception, not the rule, for the majority of the shareholders to control the company simply by virtue of the percentage of shares that they hold.

In other words -- don't confuse equity split with control. Solve each of them independently.

IMHO the wisest thing to do as a two-person startup is to split the equity 50/50, each take one seat on the board, and agree on an independent third board member whom you both trust to resolve standoffs fairly. This independent board member is not intended to resolve every day-to-day dispute that the founders have but only to serve as a rare tie-breaker in the unlikely event that the founders' relationship has deteriorated to the point where they are unable to resolve their own disputes.

answered Mar 29 '13 at 12:51
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Joel Spolsky
13,482 points
  • +1, especially the last paragraph. – Steve Jones 9 years ago

3

You both know sometime reaches when tough decisions should be made. It is not about power or financial benefit. Equal shares will end up you to deadlock in some point. Don't ruin fairness for 2% more shares or something like that. You need a third person who should be trusted by both of you. Whenever a deadlock is going to happen this person will prevent it.

The point is: Even A Correct Decision Is Wrong When Its Taken Too Late This person would be stronger than both of you even with 2% of shares so he should be trustworthy. In your career you will give up more shares to key employees, new investors... so this is a temporary solution to avoid deadlocks before you reach that point.

answered Mar 29 '13 at 05:27
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Xaqron
311 points
  • I do see how the third partner could avoid deadlocks, and why he or she would need to be particularly trustworthy. Can you please comment on why what you've proposed is better than sticking with two partners with 50/50 equity split, and giving one of them more (or less) voting muscle than the other? I appreciate third-party perspective, but also believe that some business decisions are not best made democratically, but instead according to the vision of someone who's been trusted with power. – Smarterthistime 9 years ago
  • There is no problem with 50/50 situation if both parties are really comfortable with. In that case you won't ask the question here. My solution is not better than yours unless removes a metal bias which is destructive over time. Just showed you an alternative. There are some points when nobody knows what is exactly right thing to do. If who is going to give up authority is mature enough to understand that and not blame the other side after fact, there is no problem with 50/50. As I said that would not last a long time if you are gonna succeed. Hope so. – Xaqron 9 years ago
  • It seems that you are missing or devaluing the key component of my original post and follow-up question. I'm not asking if a "standard" 50/50 equity split is wise--I'm asking if a 50/50 equity split with a mechanism to award control to one of the partners is wise. – Smarterthistime 9 years ago
  • I didn't missed your point. Just briefed it to `50/50` as I said `who is going to give up authority`. If you are going to take authority, remember you are taking responsibility too. – Xaqron 9 years ago

0

To summarize, you both seem to agree you want to split the company fairly, but both want you to be able to control the company.

What is wrong with 51% for you and 49% for your partner. You get the control you want, and the 1% difference makes little ownership difference.

You obviously discuss this with your partner and make sure he is ok with the idea upfront.

answered Mar 29 '13 at 06:26
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Gary E
12,510 points
  • An accurate summary, and a fair question, thanks. I'm not taking the position that 51/49 can't be made to work, but I do want to provide maximum satisfaction, and it rubs even *me* the wrong way that the "price" for me getting control is paid with his equity. "I own 2% more than you, so I get control" makes perfect sense, but "You gave me control, so I get to own 2% more than you" is not what I'm looking for. The perception of maximum fairness has huge value. – Smarterthistime 9 years ago

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