Splitting Equity Among Founders

Previous discussion: https://news.ycombinator.com/item?id=10665113

In my opinion this should be taken with a grain of salt. There may be a little bias too since YC obviously has an interest in the most stable of all configurations for their startups, which is the 50/50 split (although it may not be the most fair one).

I came up with the idea for the company Indeed a silly reason for unevenness.

I started working n months before my co-founder IMO if n > 6 it's a valid reason.

This is what we agreed to Well if it was a fair agreement among equals, why not?

My co-founder took a salary for n months and I didn’t Again, for n larger than a certain number IMO this is a perfectly valid reason not to split equally.

I started working full time n months before my co-founder See above.

I am older/more experienced than my co-founder Silly reason to some extent. All other things being equal a drastically more senior co-founder will likely have more contribution to the startup.

I brought on my co-founder after raising n thousands of dollars If n > 100 I think it's a valid reason not to split equally.

I brought on my co-founder after launching my MVP Depends on what the MVP is and how much traction it has.

We need someone to tie-break in the case of founder arguments That alone is a silly argument.

Note: Edited for formatting

I'm curious about equity splits that are unequal, but not woefully lopsided, eg. Microsoft's 66/33 split, YouTube's roughly 45/45/10 split, or Apple's 45/45/10. Do they have similar problems? It seems like the 45/45/10 split does - Ron Wayne left Apple, and Jawed Karim seems to have been a bit of a loose cannon at YouTube (uploading all the copyrighted content) and hasn't worked with the other YouTube founders since. But then - maybe those partnerships would've foundered anyway? Reddit's equal split between it and Infogami didn't really work out either. Are there any companies out there that have succeeded with 60/40 or 65/35 splits, or 40/30/30 between 3 cofounders?

Honestly, looking at the history of startups, it seems like it really is "growth solves all problems". Startups that have users who desperately want them can survive single founders (PlentyOfFish, Instacart), a 90/10 equity split (Netscape), one founder who screws the others out of equity (Facebook, Microsoft), founders who barely know their cofounders (Parse, Dropbox), founders who break the law (IBM, YouTube, Zenefits, Uber), founders who quit (Apple), founders who bow out (Uber, EBay), all the way up to founders that split shares equally and give a bunch of shares to professors & classmates (Google).

For Instagram, I believe cofounders Kevin Systrom owned 40% and Mike Krieger owned 10%. After the Facebook acquisition for $1 billion, that turned into ~$400 million and ~$100 million respectively.

Did the unequal split hurt them before and after the Facebook acquisition ... in ways that's not obvious to us?

(That's not a rhetorical question. I'm genuinely curious if the inequality led to a suboptimal outcome... such as getting acquired for $5 billion by some other company vs $1 billion by Facebook.)

A few additional notes:

1) Investors do look at equity splits. Or at least my fund does, and I assume we're not an exception. I think uneven splits can be reasonable as long as they're just. For example, I think Reid Hoffman had more equity in LinkedIn than the rest of the large founding team combined, but that made a lot of sense: he already had a great name in the Valley, he self-funded the business for the first year, and so on. It would have been much harder to find a substitute for him than for other founding team members (all of whom were great in their own right).

2) I don't say "always" very often, but you should always have vesting. Always. I've seen friends break up over equity issues because they didn't have vesting. You don't necessarily have to do a 1-year cliff, but it should take years for someone to accumulate 30% or 50% of a company.

3) If you're interested in advice on this topic, the book I always recommend to people is The Founder's Dilemmas (https://www.amazon.com/dp/B007AIXKUM/). The author analyzed data on thousands of founding teams to come up with practical advice for people who are starting companies. There's a chapter on equity splits in the book.

My buddy and I split everything down the middle. You either completely split it or don't split it at all. If you don't agree to a total split you're going to end up micro penny pinching. "Hey man do you wanna cover the Slack monthly and I'll cover the GitHub?" doesn't work. We just determine what we need, run the billing on a mutual business account and pay it off equally. We split all profits and expenses.

Of course if there is a significant workload discrepancy this doesn't work, this assumes equal work from both sides. Realistically you're not going to be able to perfectly quantify workload %. As long as we put in relatively similar hours on a consistent basis, we split it all.

What happens when a co-founder leaves the company post-investment before having fully vested? Does the equity usually return to the other co-founders or return to the company, effectively giving all shareholders (n.b. including investors) a pro rata increase in ownership? If it's the latter, one must question an investor's incentives in giving that advice, i.e. are they just encouraging a structure that has the most probability of them ending up with more ownership than they paid for? It's actually difficult to filter for bias when your counterpart has diametrically opposed incentives.

From a recent Harvard Business Review article: "What do investors make of teams that split the equity equally? Our data suggest that they are less than thrilled. Even after statistically controlling for a lot of factors, our data still suggest the same basic message: companies that have equal splits have more difficulty raising outside finance, especially venture capital." [1]

[1] https://hbr.org/2016/02/the-very-first-mistake-most-startup-...

I have a strange counter point..

I am married, I started a company with my wife after I put about a year into the product. Technically, we split it 65(me)/35(her) from a company perspective. We came to these terms based on what each person brought to the table.

On the other hand, now that we are married we do actually "go to war" together and have only joint accounts.

The mutual success and splitting everything evenly worked well for marriage. But it honestly made no difference for the company. We both work hard, we both enjoy the challenge, but in the end thats now what the equity split was about.

The equity split (to us) meant who had more assets (time, money, explerience, etc) to bring to the table. We wanted just compensation, and we felt it was/is fair. I think that's the only "fair" way to do it. I'm not going to marry my co-founders (at least not any more), so it should just be based on trade.

On the other hand, if you're just starting off and plan to work equally hard, 50/50 would be fair.

Giving arbitrary rules for every situation seems like a bad time.

The listed reasons all seem make a lot of sense, but why would they apply only to founders, and not to first employees? Especially so when first funding today often arrives before any product is even built.

Equal splits make a lot of sense. If I had it to do over though, I think I would make vesting more reflective of the 7-10 horizon than the standard. Only problem with that is that it can create weird incentives to people who come later in the cap table.

I didn't understand the very last part:

> Another good contingency measure is for only the CEO to hold a board seat before a significant equity fundraise. That will prevent board disputes during tough decisions, such as in the unlikely event that the CEO has to fire a co-founder.

Can someone please unfurl what this means? Is it arguing for the founders NOT to have a board seat before significant equity changes so that the CEO can be the arbiter betwen them? (Btw, it's odd to assume the CEO is not a founder).

Had to create a throwaway account for this one. I was involved in a founder split that was wildly uneven years ago. The justification sounded good that the beginning, but the imbalance became more and more evident as things went on. Ultimately, one co-founder left, one was bitter all the time, and one ended up with a significantly disproportionate share of the company. It just didn't work at all. Seibel is right here, start with equal shares, and only modify if there is a significant imbalance. All the justifications you can come up with at the beginning of a company just aren't able to take into account what will happen 7-10 years from then. Keep it fair, or you risk introducing a whole load of extra baggage to an already impossible task, right at the beginning.

I agree with the 'it's all ahead of you bit'.

BUT - what if someone spent a year or more making a product, got it to MVP, and then took a couple of others on pre-funding.

Most of the vision, concept, and maybe even the trickiest might possibly have been done ...

I wonder what his thoughts are on that ...

I guess it makes sense that if you object to having nearly, if not completely, equal equity splits, you shouldn't work together.

If you aren't willing to give significant equity, they either aren't valuable enough or you don't see them as crucial.

I will say that years ago in grad school I went over-fair on the equity split of a startup I was attempting with 40-30-30. Our last big potential investor walked because he wasn't comfortable investing in any setup in which 1 person couldn't make the hard decisions if they had to. My co-founders weren't comfortable with that.

Now we all have jobs. :-)

One of these days I need to write about that startup. It was 03-04 and just the differences in technology at the time that led to some of our architectural decisions are mind-boggling.

The point of giving someone equity is that you can't pay others with cash, assuming you have the choice. If you have the choice it might well be you would rather start the company alone. There is a very interesting dynamic between the point of some participant being a founder and being an employee - late founders and early employees can be very similar to each other. Assuming a business is already generating revenue of even profit, the dynamic changes.

Splitting equity equally is a terrible idea, to use an old quote "Too many Caesars is not good". In any organization there has to be a one leader who is accountable. In case of the startups mostly likely that person is going to be the majority shareholder, splitting equally creates a rule by committee style of management, which is a terrible way to manage a company or country. Ask the Soveits if you don't agree.

IMHO this is a very individual matter. An uneven split among founders should not be red light, as long as it is in the same magnitude.

I'm surprised YC hasn't explored Dynamic Equity Splits at all:

https://techcrunch.com/2013/02/09/the-perfect-cap-table/

Any advice on clearing up an unequal equity split down the line? What are some ways to rebound from these pitfalls if founders realize, post-investment, that an initial mistake was made?

I really doubt one-size fits all advice is appropriate here.