Startup equity share among co-founders: What is the fair thing to do


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In a startup company, there are 4 people involved, and all of them work on a sweat equity basis. Here are the people and their role:

Person #1: Helped shape the idea with person #2. One of the two initial people in the project. Has a background in computer science and entrepreneurship. He is responsible for server-side development, web&graphics design and is actively involved in other aspects in business, helped and helping to write the business plan, marketing and other business decisions.

Person #2: Helped shape the idea with person #1. One of the two initial people in the project. Has a background in finance. He is responsible for marketing, finance and payments. Initially wrote the business plan. He is involved in marketing and other business decisions as well.

Person #3: Brought by person #1 a month later. Has a background in science. He is responsible for the client-side coding and web design, and is pretty experienced in that. The only other technical person in the group other than person #1. He is not involved too much with marketing and other business decisions.

Person #4: Brought by person #2 two months later. He has a background in finance and has experience with non-profits which are a part of the business. He is well-connected and expected to bring new potential customers & VCs on board. He is also involved in marketing and other business decisions.

The product prototype and the business plan is ready, person #2 and #4 will spend a bit more time in the next 1.5 months than #1 and #3 to get in touch with connections and see the potential possibilities. Everybody work equally after the next 1.5 months.

Considering everybody's role in the company, what do you think would be a fair share of equity among these people?

Thanks for your suggestions.

Co-Founder Equity Shares

asked Mar 20 '12 at 06:44
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Dave
1 point
  • possible duplicate of [What would be a fair equity distribution between me and my co-founder?](http://www.brightjourney.com/q/fair-equity-distribution-co-founder) – Karlson 8 years ago
  • @Karlson, I looked at that before. Totally different situations, thus not a duplicate. If you have suggestions, I'd like to hear them. – Dave 8 years ago
  • The only time it would be different is: #1 and #2 formed the company and hired #3 and #4, as you describe it some started earlier some started later but you all 4 are co-founders. And whether it's 2 or 3 or 4 for same principles apply. – Karlson 8 years ago
  • There are many other virtually identical questions here, you might want to spend some time looking through those answers first, then repost with something more specific or based on what you learn from the other posts. – Jonschlinkert 8 years ago
  • Can you try the co-founder equity calculator? Your description is missing key information such as: who is critical. Why two "finance" people, their value is unclear. – Alain Raynaud 8 years ago
  • It is impossible for us to answer this question. YOU and your partners have to answer it to the satisfaction of everyone involved. – Tim J 8 years ago

1 Answer


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If I were you, I'd set expectations, and give ownership shares based on each partner hitting their targets. Take ownership away for missing targets in the first year or until you understand the business model better.

I hate to say this but the idea isn't important if it doesn't never make money but at the end of this exercise, the partners could decide to give the idea man a little extra if you're trying to work out that everyone is about even. I don't think these partners should be even.

Try to put a value on each person's sweat equity up to date and projected until you start being profitable (all sales minus all expenses including pay). The easiest way to do this is to consider what each could make as a consultant or employee hourly, then multiply their hours by their bill rate. The fact is, whoever was brought in by the idea man can be replaced, and what you want is to figure out the cost of their replacement.

Now you see proportionally who is more valuable than others. Discuss this with everyone and from there have a conversation about how you guys want to handle it so that peoples' work is reflected fairly in their ownership - and that's where the 'expectations' come in. Each has their own target of performance (a defined metric: X delivered by Date or with value of Quality or under certain Cost). If they continue to meet expectations, their ownership remains the same or grows. If they start petering off over a defined period of time, their ownership stake drops. If you start making sales, you agree ahead of time what to do with it (ie re-invest or pay yourselves).

Also discuss how you want to handle someone deciding not to continue to support you at all, not in kind or with the value in cash. Do the others have to buy that person out and how will the calculation be done? Does the person simply forfeit all their shares by going dark on the other partners?

Once you draw up some ground rules about how you'll treat each other in the business and how you want ownership to work, go visit a lawyer so they can put it in writing for you in your operating agreement.

answered Mar 22 '12 at 01:58
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Paige
129 points

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