equity distribution amongst startup co-founders?


5

I think that a justified equity distribution amongst the co-founders is extremely important for the startup to takeoff, but tricky part is, how to go about doing it ?

I'm curious to know, how does it happen in the real world and with the most successful to good startups ?

Do the founders always take equal stakes ? 50-50 ?
or Do they divide stake based on the investment made by each founder ? experience ? monetary ?

and Is it wise to keep aside certain equity stake to be given away while growing the company ?

Thanks

Equity

asked Oct 10 '09 at 19:47
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Phoenix24
126 points

4 Answers


2

If you have two co-founders that are going to put all their effort to the startup and neither of them provides significant seed capital, I don't see any reason not to split 50-50. It's a long road ahead and an initial investment of time and energy is insignificant compared to work that has to be done.

This was the case for us. I'd do 50-50 split also in the case that I would provide somewhat more seed capital than the other co-founder.

However, if one of co-founders brings a significant amount of seed capital into the company, it's a good idea to negotiate a valuation and take it in as you would take a seed investment from a third party. I'd probably still do a seed investment from a co-founder as an interest-bearing non-convertible loan.

Btw. just Googled as I remembered Chris Dixon writing about this. He gives some tips for unequal divides.

answered Oct 10 '09 at 21:27
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Tequilatango
171 points
  • +1 agree. There is so much more value being created down the road, that you'll want everybody to start out equal. Chances are that you can't predict who creates what value anyway. – John Sj√∂lander 9 years ago

2

Lance Weatherby (an Atlanta entrepreneur guru) also did a good writeup. He talks about figuring out the split, but also about setting everyone up on a vesting schedule to protect yourself against a co-founder walking away with 50% of the equity after 6 months of doing nothing.

answered Oct 10 '09 at 21:45
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Micah
880 points

0

Equity splits among co-founders can be tricky when you bring in the "value contribution" as Aprit has mentioned in his answer. I wrote a post on this matter with a method that has assisted me in developing a more transparent guideline that can be used.

Calculating Partnership Equity Splits Another factor that was brought up in the great post on equity splits by Lance Weatherby was on vesting schedules. I have a short explanation on that as well linked to the post above.

Hope that helps a little.

answered Oct 11 '09 at 05:24
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Usman Sheikh
1,728 points

0

Technically, equity distribution is proportional to the "value contribution" by each stake holder.

In general, tangible contributions (investment, land, resources) are considered much more important than intangible contributions like experience/expertise.

Practically, when human factors step in, there will be a few adjustments and compromises to be made.

If its a capital intensive venture then may be you'll need to figure out the distribution early on. Here iron-clad agreements play a major role.

But if its just a few computers, less then 5 employees... it will be best that you forget equity distribution for the time being and let the business grow. Here, over the time you'll know who contributed what and hence the distribution.

answered Oct 11 '09 at 00:48
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Arpit Tambi
1,050 points

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