Failory - How to Split Equity Among Co-Founders

Hey — It's Nico.

In June, I'm publishing articles related to Co-Founders. This week, an article on a controversial topic: How to Split Equity with Your Co-Founders.

🙌 Welcome to the 523 founders who joined this week.

This issue is brought to you by Around:

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I've since stuck to Around for two reasons: 1) it frees up my screen, which allows me to easily read and take notes as I have the call; 2) my background image and noise are always messy and Around helps me avoid founders from noticing this.

After you’ve found a co-founder for your startup, one of the most important decisions to make next is how to split equity with them.

When to split equity? How you will be splitting equity should be included in your written and signed founders’ agreement, so there are no issues or conflicts regarding equity down the road.

This contract is something that you and your co-founder should put together and sign soon after you commit to working together on a startup project.

What happens if a co-founder leaves early? A vesting schedule protects you and your co-founder against this. Each co-founder gets a certain % of their equity at regular intervals, and you usually don’t get the first shares until at least a year into working together.

A four-year vesting schedule would mean that you and your co-founder each get 25% of your due equity every year after the first year until you have received all of it after four years.

When to split equity evenly? Almost always. Dividing equity equally helps ensure that all co-founders are equally committed to and invested in your company and its success — and that’s precisely why you want a co-founder.

While there may be some cases in which it makes sense to split equity dynamically, startup expert cautions against unequal splits because they assign more value to one founder over the other, which can hurt productivity and lead to future conflicts.

​In the article, we analyze all of the reasons why splitting equity evenly is the best path in most cases.

What are the drawbacks of splitting evenly?

1. It can impact decision-making and lead to stalemates if the partners don’t agree on something. This is mainly true for two-partner, 50-50 equity splits. This is one reason why some founders choose to do an almost-even split, such as a 51-49.
2. Another drawback of even equity splits is that they don’t always feel fair if one co-founder contributes significantly more time and resources than the others. It’s still worth considering an even split because their contributions will hopefully increase in the future.

When to do dynamic equity splits?

1. If you want to have a controlling partner with a slightly higher percentage of shares to make voting on business decisions easier and more agile.
2. To give one co-founder a slight majority of equity so that they will still control the majority of the company if the other partner decides to sell their share of the company in the future.
3. If one partner will clearly be doing more work than the other. Although in this case, you should reconsider your co-founder since you should ideally be dividing the workload evenly.

Should the CEO receive more equity? The CEO should receive the same equity as all the other co-founders since an even split is generally the best way to split equity among co-founders.

However, if you are going to split equity dynamically, the CEO may or may not be the person who should receive the largest share. It doesn't really depend on the role.

Which documents should you sign? All the agreements you and your co-founders make regarding equity and vesting should be written down in legal terms in a co-founders’ agreement that all parties sign.

To ensure that this contract is correctly written and legally binding, it’s best to have a business lawyer compose it or at least look over it and provide feedback after you put it together.

If you want to learn further about the benefits and drawbacks of equal and dynamic equity splits, check our article.

​Here's our guide to Splitting Equity with your Co-Founders.​

If you found today's article useful, you may enjoy these three we published in the last weeks:

• ​How to Find a Co-Founder​
• ​How to Find a Technical Co-Founder​
• ​Startup Founder Agreement​

As every week, here are 3 recommended resources:

• ​Revenue-Based Financing: Companies struggle to raise capital fast without losing equity. Revenue-based financing helps you fund your business with no dilution, collateral, or personal guarantees. This is a report on the topic.
• ​The Importance of CAC Payback: LTV / CAC has become the gold standard metric for startups. However, it's CAC payback that has the biggest implications on a company’s ability to scale efficiently, particularly in today's market environment. This article analyzes why.
• ​Crisis Management: In this podcast episode, Reid Hoffman and Chris Yeh discuss the key lessons they've learned from past crises in their careers and the strategies for startup founders to navigate the current crisis.

I hope you enjoyed this week's newsletter!

Cheers,

Nico