Starting a business is an exciting but challenging venture. One of the most significant challenges is deciding how to split equity amongst founders. While it can be tempting to split equity equally, it may not always be the fairest solution. In this article, we will answer some of the most common questions about splitting equity amongst co-founders and provide you with a set of rules to help you reach a fair deal.
Question 1: Should I give more equity to the person who delivers results?
The simple answer is yes. If one co-founder works more and dedicates more time and effort, they deserve more equity. It is recommended to sign a vesting agreement to regulate this kind of situation. A vesting agreement is a contract between co-founders that regulates how the split occurs. It stipulates that the co-founder who leaves the company forfeits their unvested shares, which are then redistributed amongst the remaining co-founders.
Question 2: Should I get more equity as a person who came up with the idea?
No. Everyone involved in the execution of the idea should get their equal share. Ideas are worthless without execution, so it does not matter who came up with the idea.
Question 3: Should the CTO get more equity as they know how to build the app?
No. While the CTO’s skills are essential, they alone cannot guarantee success. Selling and marketing are equally important, and co-founders should have complementary skill sets.
Question 4: Should I go solo and keep the equity to myself?
No. Building a business is a stressful process, and having a co-founder(s) can provide much-needed support. Co-founders can help share the burden of building a business and provide moral support during difficult times.
Question 5: How should I split equity with a co-founder with the same background?
Don’t split equity with someone with the same background. Your founding team should consist of people with different competencies and skill sets. Co-founders should complement each other’s skills to increase the likelihood of success.
Question 6: Does more equity equal more motivation? If yes, should we split equity 50/50?
Yes. More equity does equal more motivation. It is recommended to split equity equally or on a similar level to ensure that all co-founders are motivated to succeed.
Question 7: What should I do if my co-founder leaves?
Plan ahead for any future changes in commitments. A vesting agreement can help regulate how the split occurs. If a co-founder leaves before the end of the vesting period, they forfeit their unvested shares, which are then redistributed amongst the remaining co-founders.
Question 8: How many shares should I give to investors?
Do not give away too many shares to a single investor or VC. It is better to have smaller rounds and give smaller parts of the company to different people. When looking for a seed round, do not give away more than 20% of the company. Aim for 15% as a perfect deal.
Question 9: Should I consider giving loyal employees any part of the company?
Yes. Make sure you have around 10% of the company shares reserved for key employees who have brought a lot of value into the company. It is a great way to motivate employees, as their share value will grow only if the company grows.
Rules for Splitting Equity Amongst Co-founders
To help you reach a fair deal when splitting equity amongst co-founders, here are some rules you should follow:
- Aim to split equity as equally and fairly as possible.
- Do not take on more than two co-founders.
- Your co-founders should complement your competencies, not copy them
- Use vesting. Always.
- Keep 10% of the company for the most important employees.
- Do not start looking for funding too early. If you are a B2B SaaS startup, start only after your ARR (Annual Run Rate) reaches 100k.
- It is better to get three smaller funding rounds rather than one big one.
- When looking for a seed round, do not give away more than 20% of the company. Aim for 15% as a perfect deal.
In summary, splitting equity amongst co-founders can be a complicated process. It is important to have an honest discussion with all parties involved to avoid friction. While splitting equity equally may seem like the easiest solution, it may not always be the fairest. Co-founders should have complementary skill sets, and equity should be split based on the contributions each co-founder makes to the company. Vesting agreements can help regulate how the split occurs, and key employees should be given a small percentage of the company shares to motivate them to work harder. Finally, when seeking funding, it is better to have smaller rounds and give smaller parts of the company to different people.
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