The only wrong answer is 50/50: Calculating the co-founder equity split

http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split

by jheitzeb • 15 years ago

135 36 15 years ago

randall2• 15 years ago

I think this is pretty much bullshit. The only part I agree with is full-time status... but that's a no brainer. The rest are "pretend realities." There's no reason why a CEO should get more, nor the person who came up with the idea... and the article doesn't have any more convincing an argument than "market realities."

As for reputation, it depends. I do think having someone who's a "name" as a cofounder is helpful, but does that "name" actually mean anything? I guess it could if you refer to the equity equation.

http://www.paulgraham.com/equity.html

Still, I think going for the "married couple" approach of as close to equal as possible makes sense. Finding an equal cofounder seems crucial.

danshapiro4• 15 years ago

Perhaps market realities aren't convincing to you, but they're quite real. Capable CEOs demand much more equity than capable CTOs in the market.

http://onstartups.com/tabid/3339/bid/66/Startup-Founder-Comp...

I believe a much smaller difference than this article is warranted, since most of the equity is compensation for risk, but some reflection of market is appropriate.

randall2• 15 years ago

I think the disconnect happens in "experienced startup land" where someone has a proven track record, and "scrappy startup land" where it's just two folks with a dream. I can't imagine scrappy startup founders ever having anything but equal equity. There's no market for their services as a CEO, and the founder that they're working with should probably be their best friend from college / work / equiv.

brudgers3• 15 years ago

Shapiro's inclusion of Microsoft's founders is interesting because recently Paul Allen has described the host of problems unequal division of equity caused [http://news.ycombinator.com/item?id=2386908]. It's hard to argue against Microsoft's success, but then again it is hard to argue against Google's founder split either.

Shapiro makes a good point about not avoiding tough decisions, on the other hand, Spolsky's approach avoids picking a fight unnecessarily - just as not trusting the CEO to run the company is a mistake, likewise if a person's biggest concern on day one is who owns how much of something worthless in terms of dollars you probably have selected the wrong cofounder as well.

pauldisneyiv• 15 years ago

Reality: every group of founders is different.

There are no set of rules all startups should follow. There are however guidelines that ought to be considered, and discussions that absolutely need to be had.

If you believe in the concept, believe in the team, and believe it will be successful, don't sacrifice all of that due to not getting an extra 5% you believe is deserved.

Find what works for your team and build something incredible. Remember you likely are not capable of doing this on your own.

webwright3• 15 years ago

I'm in the "thought provoking post, but disagree!" camp on this one.

As a guy who has been the CEO for most my startups, I'd NEVER say that I deserve more equity because of that.

Also, 5% for the IDEA? Jeebus. Is THAT idea the source of your eventual triumph? Or is it the 100 ideas that come later? If you pivot from your idea 6 months down the road in a direction your co-founder suggests, does he get a portion of that 5%? Or perhaps more, because it's your (now shown to be a bad) idea that wasted 6 months?

I DO agree that you need rules for who wins when a disagreement can't be resolved-- you can have those rules without handing over equity. You should also have rules for dissolution.

Co-founders are a market like any other. With these rules, and with Dan's outstanding reputation, I have no doubt that he could land a co-founder. But it'd always be a lesser co-founder than he COULD get. Minority shareholders are also more likely to bolt/get grumpy when things get rough.

In short, Dan's trying to maximize his personal wealth in the (exceedingly rare) event that the startup wins (sees liquidity) rather than maximizing for the company's chance of success.

TheIronYuppie3• 15 years ago

I'm more in the "thought provoking and agree" camp. I'm not sure that of the potential downsides to Dan's strategy, a significant impact to the success of the company would be among them.

The idea _does_ get too much value here - I'd definitely put that at zero. But in my startup experiences, the CEO _does_ have to deal with a lot more annoying shit, and put her name on the line far more than anyone else, and should get the credit for doing so.

Further, I'm more in the Zappo's camp here - if a minority shareholder wants to bolt, I could not be happier. Leaving a company is always a hard decision, and if they're not cut out, AND they've come to that conclusion on their own, then FANTASTIC. I don't think that having 50% equity makes ANYONE more likely to stick around - you either have it in your DNA or you don't.

sshumaker• 15 years ago

You're arguing that the CEO should get more because he has to deal with more annoying shit?

It's just as easy to argue that the tech co-founder should get more because he'll almost certainly end up working longer hours - and be the one who has to fix shit at 3am when the servers go down.

The fact is, both co-founders have their own reasons to feel entitled to a larger piece of the pie. But the truth is, it's all subjective - and nigh impossible to really weigh whose contribution is more important to the overall success of the company. Especially on day 1.

So at the end of the day, what really matters is the perception of fairness. If you give both founders an equal share, while both may feel that they are entitled to more of the piece, it's hard to argue that it's not a fair arrangement. Nickel and diming one of your co-founders will only create resentment down the road. And for what?

webwright3• 15 years ago

"I'm not sure that of the potential downsides to Dan's strategy, a significant impact to the success of the company would be among them."

Really?!

Employ that strategy and then interview a series of great co-founder candidates. If they bring more to the table than you, imagine their response when you say, "You're bringing more to to the table than I am, but given that I will be CEO and the idea is mine, I think I should be getting slightly more equity than you."

The "you should have this in your DNA and thus shouldn't be motivated by equity" argument has nothing to do with Zappos. Staying or leaving is almost always based on a lot of things (equity, comp, passion, team, opportunity, risk etc). Everyone weighs those differently, but very few people ignore the equity/opportunity part of it entirely.

If you subscribe to that argument, why exactly are you reaching for more than half of the equity pie? Or reaching for ANY of it? And why offer stock options at all? Telling people to "do it for the love of the game" is a pretty self-serving thing to say.

danshapiro4• 15 years ago

You're assuming that I think I'm the one with the hot stuff reputation and trying to maximize my "personal wealth". But you've got it backwards. The reputation point came from trying and failing to reach agreement with two different technical cofounders because they wanted more equity based on their reputation/connections.

I was the ugly duckling, and in retrospect, they were right. I should have realized this and weighted the equity equation towards them because of their reputation and proven capabilities as compared to my own.

I should have qualified the idea point: it assumes that all cofounders are deeply in love with the idea and mutually believe that it's truly innovative, unique and differentiated, versus "Let's do a daily deals site."

To answer your question about what happens if the company pivots: the initial split is always wrong as more information becomes available (turns out Bob is working harder, or Jane takes the CEO title), but is almost never changed. So no.

ghshephard• 15 years ago

The "initial split" (aka Equity) frequently change. Lots, and lots of stories in the valley about early founders getting screwed through dilution. So much so, that I've become surprised when it doesn't happen at a successful company.

In fact, I seem to recall there was a movie about this very topic recently...

rdl• 15 years ago

The only generally applicable rule I have is that the founder relationship is ideally viewed as a long term and ideally repeatable relationship. If you leave anyone feeling screwed, it probably is a lose; you negotiate much harder and win-lose for a one time purchase with a stranger than with people you will be doing business with long term, especially people who need to be intrinsically motivated.

I think the same applies to employee salaries; negotiating someone down into taking a much lower salary than necessity is 10k sound and 10m foolish.

spolsky• 15 years ago

A lot of times I hear from people who are phobic of the 50/50 split because they're confusing control and ownership. There's no reason you can't split the ownership 50/50 and still decide that one person is the CEO and therefore has final say on all decisions. If you're still freaking out about this use a (50% + one share) : (50% - one share) split so there is a built-in, pre-agreed way to resolve conflicts.

That said, burning bridges can be a great strategy. Knowing that your co-founder is in exactly the same situation as you and that things are perfectly symmetrical can force you to actually resolve conflicts, because it takes away the option of one person shoving a decision down the other's throat.

vessenes3• 15 years ago

Interesting comment; in my experience 49.9% is worth a lot less than 50.1%, in fact, I once sold out a minority stake in a company I had originally retained majority ownership. My council told me typical valuation cut for a minority, non-controlling share was like half.

This implies to me you should really shoot for 50%, and make sure you like your joint decision-making process. Of course when you get some funding in, one of you will have to agree with investors to force something through the chain.

brudgers3• 15 years ago

Differences in equity often make little difference in terms of control, e.g. in an YC like 8/46/46 split all three have equal control when push comes to shove. Even in Shapiro's three way example, control is equally distributed.

Even with a Shapiro type 55/45 split, once the firm takes significant outside investment (or provides employees meaningful equity); the balance of control will shift to where the founders have to work together as equals. An advantage of the Spolsky approach is that the company operates that way from day one, and outside investment might be less likely to disrupt the decision making process.

daveschappell• 15 years ago

People also forget that in short order there will be other people holding varying % ownership stakes, that makes 'control' much more about persuasion/consensus building.

Plus, you can always start at 50/50 and allocate more to the person bringing more financial support (or work-for-free-ness) to the venture, as that's pretty darn valuable in the earlier days.

danshapiro4• 15 years ago

Excellent point re: control. But remember that control has a lot more to it than the 50-plus-one-share; there's also board composition and protective provisions, which are usually much more important.

I do like the "burn the boats" idea though. My cofounder and I (my first company; we had a 50/50 split) were very clear with each other that our most likely source of failure was not getting along, and would often remind each other of that when nerves started to fray.

dennisgorelik• 15 years ago

Joel, Do you have a rebuttal regarding value of founder who's not getting salary vs founder who's getting salary? In your article you are ignoring the fact that loaning your services to a startup is a very risky investment.

vessenes3• 15 years ago

This post is wrong. The central issue around equity splits is preserving equanimity and founder happiness as long as possible, in as wide a variety of situations as possible.

That is the fundamental purpose of a co-founder equity split in fact -- to allow founders to happily sacrifice and risk for corporate value building.

The niggly thises and thats this author suggest may be arguably fair day 1, but they miss both the psychology of nerd co-founders (or a nerd and a business guy), and they take absolutely nothing about the future into account.

Anyway, if this works for you and your team great, but I would bet 10:1 that with Joel's rules, the amount of time you spend fighting about equity in your first year is close to zero, definitely measured in hours.

With these rules, you will probably spend that long agreeing how much each of the multipliers is worth day two of your new startup, not to mention re-jiggering when some low-percentage (by this setup) co-founder has the actual big idea that gets you launched.

absconditus• 15 years ago

Can we remove the editorializing from the headline?

jheitzeb2• 15 years ago

The "joel was wrong" was taken from the post, and was sortof half of the article. That is why I added it. Didn't feel it was editorializing it

Gaussian• 15 years ago

Save the pedantry for execution, not micro-managing equity splits. To me, job No. 1 is keeping your small team happy, united and focused. I don't think you maintain the camaraderie necessary when you're tossing 5% and 20% bones to people who did this vs. those who did that. IMO, people who come in at roughly the same time should get the same stake, assuming they're equally focused on the task.

jheitzeb2• 15 years ago

In my view, decision-making authority shouldn't be based on percentage of ownership, but rather on the context of the decision and the meritocracy of ideas. The ultimate say should be assigned and the CEO should have ultimate decision, but even then the "healthy" way to establish that isn't through a mathematical forumla or a percent ownership, but rather through trust between individuals and agreed-upon roles.

Decision stalemate (or more generally, just spending too much time squabbling over every decision vs. spending time executing) can happen even when it's not 50/50. The key issue isn't equity stake but rather leadership, trust and culture.

My personal view is that 62% of $0 is zero...so don't sweat the equity stakes too much and instead focus on winning.

alain94040• 15 years ago

I write extensively on this topic (http://blog.fairsoftware.net) and I thought this article was pretty good. Of course, the formula provided can't be taken too literally, but it helps.

I have a slightly more radical point of view regarding the CEO and control issue. It's approximated by Joel and others when they discuss full-time vs part-time, but those are only proxies for what is really going on among founders. In my experience (meeting with more than 200 startup founders pre-incorporation), there is ONE person carrying the entire project on their shoulder, and one or more co-founders who are happy to follow. Rarely, I see two equally driven founders. So my litmus test is: "if one of you were to drop out, would the startup die?"

wslh• 15 years ago

I have a very different perspective/experience: in a new business (without explicit domain experience) it's difficult to know what actions gives the better company outcome. Sometimes a timely 8 hours of work and luck gives a better result than weeks or even years.

So, it's important to know that everybody is in the same boat.

I can give you an example from my little experience: we invested in a technology for two years with a team of 3 without any economic result (although we believed in the importance of that specific technology). One day, 1.5 years later after we put on hold the work this technology is the core of one of the products of a fortune 100 company.

So, it's difficult to estimate what founder work will give the best outcome in advance.

grandalf• 15 years ago

This contradicts advice I've been given by lawyers in silicon valley who specialize in putting together large deals with startups.

Unequal ownership signals that there are known fault lines that may get ugly later. Whose ego is so large that they insist on having 55% vs 50% of a new venture they are starting with a co-founder they respect?

The formula in this article would seem to be the sort of thing that would sometimes seem to have been a good idea (in retrospect) but would rarely help to align everyone's incentives.

Why would any full time founder accept part time participation from a co-founder? Very simple -- it's a funding strategy, not an indication of the part timer's level of commitment. If starting off as part time is what it takes to bootstrap through the an angel round, then there is likely a great eagerness on the part of the part timer to quit his day job and become full time.

As a founder, be aware of those who want to stroke your ego. All the nonsense in that article about CEO deserving more, etc., seems designed to stroke egos and lead to the founders doing whatever the lawyers tell them.

martinkallstrom• 15 years ago

Great point. Thanks for sharing this.

ookblah• 15 years ago

I'd be curious to see if there are stats on failed companies vs. the equity split.

At times when I read these articles a lot of it seems very anecdotal, and I'm inclined to just be like "whatever the hell feels right" lol. I think the most important thing to take away from this is to agree on terms, make it in writing, and set everyone's expectations from the get go.

I mean come on, he has a bad experience, which he doesn't really even elaborate why/if it's even related to a 50/50 split. Could it be that he and his co-founder just didn't fit and they found out 6 months later? Would a 60/40 or whatever else split have mitigated that?

Perhaps I will eat my words in the future, but I'm equal split w/ my co-founder and I feel like we have arguments every week, but we always strive to resolve them and to move forward with what we feel is best. In my head I just can't figure out how negotiating a "better split" would somehow help a relationship.

The only wrong answer is 50/50: Calculating the co-founder equity split

Related Stories