Why split equity at the beginning?


2

One of my co-founders is suggesting that we split equity based upon the number of hours each person puts in until we obtain funding and begin drawing salaries.

In other words, each person would be issued vesting shares equal to

(their # of hours) / (total # of hours)

Most startups split equity at the beginning of the venture, rather than use this approach. Why not use this time-based approach?

Equity Shares

asked Jun 23 '11 at 10:08
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A Fake Username
86 points
  • Using hours is a bad way to measure anything. Productivity is what is important. Do you really want a time-clock? There are plenty of questions and answers on this site regarding how to split up equity - go take a look at those. – Tim J 9 years ago
  • @Tim, I agree that productivity is what matters. The only way to measure that is to set milestones for each person, right? – A Fake Username 9 years ago
  • @Tim Yeah, I've asked similar questions, but they all have distinct differences that warrant separation IMO. – A Fake Username 9 years ago
  • milestones are bad too (at least once you set them beyond a 1-month horizon). – Alain Raynaud 9 years ago
  • @Alain Is that because of the frequency of pivoting? – A Fake Username 9 years ago
  • Yes. Startups are very dynamic. You can't tell what your objectives should be 6 months from now, especially when you are just getting started. Having a written objective tied to major compensation (bunch of stock vesting) that is obsolete is really bad. – Alain Raynaud 9 years ago

3 Answers


2

Use this... It's called the co-founder equity calculator. I find it useful.

answered Jun 23 '11 at 14:36
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Xoail
365 points
  • This is a great calculator. My feeling has said my co-founder should get 20%. My co founder that he wants 33%. The calculator says 17% which would be really acceptable for me. Love it! – Christian 9 years ago

1

If you're working towards funding with the intention of going full-time, what ought to drive the equity split is that fact, your roles going forward and what you're each bringing to the party.

So my first thought would be that if the level of inequality is beyond what seems reasonable, then keep track of the salary sacrifice and think of it as an obligation between co-founders first and foremost.

What's 'reasonable' can vary a whole bunch. What's key is to avoid getting into a situation where someone feels taken advantage of. Discuss it, agree how to work, and keep it under review. No-one should feel they're signing a blank cheque of hours - and in most cases, no-one should feel they can just sit out the hard work until the money comes in!

answered Jun 24 '11 at 00:23
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Jeremy Parsons
5,197 points

1

Splitting equity equally is an obvious, but bad approach. But, micromanaging hours spent is just as bad. You have two extremes; one with no granularity or differentiation, and the other with way too much picayune detail.

See my post here for a summary of my approach.

As a side note, if anyone is actually laying down serious funding money out of pocket, beyond paying for business cards and such, they should be paid in preferred stock, as any investor would.

answered Jun 24 '11 at 00:49
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Alphadogg
1,383 points

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Equity Shares