Cofounder Equity – Learn to split the Pie
When you come up with a profitable and marketable idea, it’s high time for you as a founder to realise that ‘Two heads are better than One’. At this point of time, you search for a co-founder. If you are lucky enough to find someone of your preferred mentality, things are going to be challenging.
One of the most important Challenge is splitting the equity among the founders. This is a crucial step in your startup, and believe me, this discussion room has shut down much more startup firms than you can imagine. The discussion room must be filled with a verbal, mental and emotional conscience.
Assuming you are the founder, with a mind-blowing marketable idea. Your co-founder is going to take care of the technical aspects of developing the software you need. According to your co-founder, he’s taking up a high-end task of developing the whole software, you would need to run the business. He’s the one going to burn the midnight oil to make your business run at the initial stages. At the same time, just because you came up with a profitable idea, doesn’t mean you have a grant for 90% equity. So here comes the splitting of the pie.
Cofounder Equity : What should you think about 50/50 equity split?
A 50-50 equity split might be one of the worst decision you may take as a founder. A 50-50 equity split just signifies your low confidence level as a founder of a firm. Always remember, a technical co-founder might burn the midnight oil to prepare the software in the initial months, and you as a founder would be waiting simply for the software to get ready. So, the activities of a co-founder get bestowed as a higher one at that instant. In fact, coming down to reality, after months of preparation of the technical part, the founder’s task of marketing, user acquisition and other non-tech aspects takes a huge effort. Also, you always have the option to hire some other technical guy to complete your software.
So now, think a fast-forward of 2 years from the present. Is a 50-50 equity split reasonable?
Well, definitely not. The biggest deal now is to make the co-founder understand this with all mental, emotional and verbal conscience.
Also, it’s worth noting that your firm is expected to run for several upcoming years. Will the co-founder stay in your firm for such long time? You cannot allow a co-founder to quit the company and also carry a huge share in the firm. That’s where the vesting of equity comes into the role. The discussion of splitting the pie goes incomplete without mentioning the vesting period.
What to consider while splitting the equity ?
I would recommend you to go via a logical framework that would eventually evaluate the co-founder’s or any employee’s contribution to the success of the firm. The logical value of Input, Risk that was taken and dynamic changes in input with time should be considered in the allocation of equity.
Also, now we need another logical framework to recover the equity when a co-founder or employee leaves the company. A good framework will look into the contribution of a person as well as the nature of separation. If the contributor separates due to his/her own fault (may be failing to work for the firm) or if the firm decides to layoff some of its employees (may be due to some restraint) – At these situations, the framework should support and benefit both the company and the contributor.
Characteristics for splitting the cofounder equity:
1. The First time experience of working in a startup environment before.
2. The Achievement of the previous startup the co-founder had worked in regards to his/her contribution alone.
3. Activity of the person with regards to the firm (CTO / COO/ CMO/ other)
4. Willingness to work full time only when the firm gets funded
5. All Monetary contribution to the firm till current time.
6. An Estimate of rate per hour that can be expected for the contribution of the co-founder to the firm
7. Number of hours the co-founder spent working on this project (e.g. average number of hours worked per week x number of weeks worked)
Splitting the cofounder equity – Bottom Line
Based on the evaluation above, splitting of equity can be evaluated. Also, a co-founder equity of maximum 40% can be suggested, but remember, it’s always subject to evaluation. If you believe he could be the only person in the whole world who you crave to do this activity, you can go with 50% equity sharing.