Unequal Cofounders
blog.eladgil.com
blog.eladgil.com
IF you are starting a company with others, decide week 1 what the split of equity is and who (of any persons included) are cofounders or part of the "founding team".
IF you are starting a company with other cofounders, week 1 split the equity evenly and assign functional roles (not necessarily titles - those can evolve).
I have seen multiple companies explode, friendships deteriorate, businesses die a slow death, or waste hundreds of hours (and dollars) working through the emotional debt built up from not splitting equity evenly.
- Edit - changed day 1 to week 1 because typically there is a process of "should we start a company", "should we do it together", then "how" that takes some time. But once the "we are going to do this phase starts, you're in week 1
The ideal situation seems to be that anyone doing work immediately vests ownership upon performing the work.
Granting stock (not options) with no vesting schedule is probably one of my biggest regrets.
To add counterpoint to the discussion, Mark Suster (VC Upfront Ventures) uses the factors you listed as reasons for not doing equal split.[1]
Robin Chase (co-founder of Zipcar) also regretted her decision to split equity as 50/50.[2]
I'm not arguing with you. Just pointing out that reasonable people disagree on equal/unequal philosophy using the same reasons as justification.
[1] https://www.youtube.com/watch?v=oAHgGUFjK3c
(A slight correction to the video about Youtube's 3 cofounders: I believe the Youtube split wasn't equal as 33/33/33; instead it was 45/45/10.)
[2] https://hbr.org/2016/02/the-very-first-mistake-most-startup-...
Majority of people starting a new company are very unfamiliar with equity splitting, vesting and everything related to theses things. On top of that, usually the team members aren't even well defined yet, same as the idea for the company.
A lot will change even in the first 6 months of a company that would justify different equity splits for different members that are still founders but join with different (implicit) roles and at different times.
Sadly, unless the founders are extremely lucky, it will probably take them a lot of experience and maybe going through failing a few times until they get the equity split right from the get go for a new company.
And there's a bunch of other external and unpredictable factors. For example: about 4 years ago I started a company with a couple other people - each founder joined at different times and had different amounts of equity - a few months after winning a hackathon, incorporating the company, raising some angel money and getting our first few clients, we applied to YC, got an interview and then got an offer to join YC, but one of their partners wanted us to change the cap table to remove some of the people that had equity and re-split the equity among a subgroup of the founders. We couldn't do it, so they withdrew the offer to join.
Typically during the initial phase (and forever forward) visible contribution changes.
Do you think it is a coincidence that the leader of Alphabet resigned not long after failing to answer one of Google's own interview questions about how he might split up pirate booty?
But of course, the vast, vast majority of startups do not become extraordinarily successful companies. Most fail, and of those that succeed, most are moderately-very successful.
I wonder what the data is around moderately successful companies. It is less important to me that I raise my chance of being extraordinarily successful from .0000001% to .0000002% (a doubling!) than that I raise my chance of being moderately successful from 20% to 30%.
It is possible that having an even split makes it more likely that you get to some level of success, even if it makes it less likely that you make it to the stratosphere.
Yeah. I'm talking about Jobs and Zuck. Fuck those guys.
Jobs: I heard Wozniak gave up his shares to other co-founder voluntarily. Not sure as I am as apathetic as possible about Apple.
Zuck famously fucked Eduardo Saverin by making sure Saverin’s shares got diluted from 30% down to 0.4%, while protecting his own stake. There was a huge lawsuit about that.
So no, this isn’t some decision from the start. these people have a track record of screwing over their founders.
As a company grows, people in authority often have few levers they can actually manipulate, so they endlessly obsess over them. Especially if its an engineering-centric company, and the person doesn't have any engineering knowledge.
This sounds bad to me - it might not be what the author meant, but it sounds subjective. I feel like making the equity split subjective and based on some perceived "value" of a person or their contributions is a way to guarantee fights and bad feelings in the future, when the person who said they'd solve all the problems backs out, or when someone unexpectedly invents the key algorithm or closes the deal that keeps the company alive. The value of founder contributions (other than time & money) cannot be known in advance.
There are ways to define contribution, relative risk, and time/money investment in purely objective financial terms that are fair to everyone and still benefit the early risk takers. Some of them have been posted already.
I did let someone talk me into inflating their share once, and it was a big mistake. I wouldn't sign up ever again to start something with someone else who argued that their share should be larger because they're more important to the company or that their time is more valuable than anyone else's.
Over the last 15 years I have participated in CEO groups with around 30 companies. My limited anecdotal experience says that a 50/50 split is bad, but a split where two people have leverage over a 3rd is ok. So a 3 way split is fine.
Ultimately there just can't be deadlock, when everyone disagrees, someone needs to be able to make the call.
> Small variations in year one do not justify massively different founder equity splits in year 2-10.
Yet this is, essentially, how it's done for employees. At least recently, YC seems to be embarking on a campaign to bridge the gap in risk-vs-compensation between employees and founders, as they did between founders and investors.
> More equity = more motivation.
I'm not sure this is always true. I can certainly attest to its falsehood when equity is in the sub-1% range, as for most employees.
Even assuming its truth, however, since equity is zero-sum, that means that the motivating ability (the "more"-ing characteristic) of equity is zero-sum, too. It doesn't, however, mean that its motivating ability is the same on every founder, nor that such motivation is of equal value.
> If you don’t value your co-founders, neither will anyone else.
> Startups are about execution, not about ideas.
Besides potential other critiques, the above two concepts seem, to me, to contradict each other.
> Equity should be split equally because all the work is ahead of you.
> what we almost always recommend at YC: equal equity splits among co-founders.
All that said, I think this is probably the best reasoning: equity split at the beginning isn't likely to be something worth spending a ton of time/stress on for the vast majority of early startups, so equal split makes a sensible default.
Re-grants of equity, or what have you, are fine, but often times in the earliest days, it truly is two to four people working equally on something. Especially when those cofounders are all putting in nothing but sweat. Regardless of who's driving vision.
I could believe that unequal equity splits are common in these mega-successes just because everyone involved is savvy enough to push hard for their own interests, but that ultimately it's an irrelevant detail to the success of the business. They'd be successful either way, but this way is the best possible outcome for the founder.
30+ year old company, started with equal split (5 ways, 1 founder bought out early).
We are not hugely successful, though I have a nice house in a nice & expensive city because of it. It is my belief the company would not exist if the CEO had gotten control early on. The equal equity was a check & balance on his power. However, there are really two possibilities:
1. The check on his power prevented us from being wildly successful because there was too much consensus needed for risky, but potentially rewarding, decisions.
2. The check on his power prevented him from screwing over everyone else.
On #2. About 7 years after starting, my CEO intimated to me that he made a huge mistake with the initial equity split, and when I asked why, he said he would be cash cowing the business for his own personal gain and he would be much wealthier. Now, he didn't phrase it just like that, but that's what he meant.
The truth is, once you have control of the shares, you can do anything to anyone.
I won't give the name (let's call him Mr. X), but an early investor in the company was serially successful at startups and making a lot of money. Two related facts about him:
* One of X's co-founders once told our CEO that he made almost nothing from the startup that X had made many millions from. His initial stock had been diluted to nothing, because X controlled the majority of shares and the board.
* In the 90s the SEC went after X for dubious sales practices (selling hardware and buying it back under the table to inflate company value... yes, they were public). He paid a large fine and agreed not to be an officer of a corporation for 10 years, but he died before that expired.
After these two events, I started to look at successful people in an entirely different light. Nothing I've learned in the 20 years since has changed the view that 99.9% of successful people, aside from being smart and hard working, are either in the right place at the right time or use ethically dubious methods to get ahead. There are exceptions, but they are exceedingly rare.
Sorry for the rant.
A company I helped found had an uneven equity split. I was focused on building our platform out and didn't really care about the equity after we set the initial split; Because I was so naive and had a co-founder like your Mr.X, only my equity share was diluted each time we hired someone. Eventually I noticed but it was far too late for me to do anything about it; Years later I carry this lesson with me to constantly pay attention.
[edit]: Forgot to mention my Mr.X drove the company into the ground after I left.
Things are simpler when there is some simple measure of "fairness", such as salary. With equity it is always more complex, since equity also relates to the risk position, is hard to assign value to, etc.
Wait, so equity share dictates consensus? In my 20 years of working in startups, I haven't seen a relationship between share ownership and board control (other than chairman) and the company executives.
The CEO dictates what happens, period. He can either be a consensus builder -- to his benefit or detriment as the case may be -- or a dictator ala Jobs. Just because everyone has an equal share doesn't mean the CEO needs to build consensus. And he doesn't need a check & balance on power. He is in the position of CEO because the rest of the folks trust his leadership, not because he has 1/5 + 1 shares.
It sounds like you had poor corporate governance, unrelated to equity sharing.
EDIT: TFA states this directly, as well.
> Unequal co-founder relationships are a way to dampen future co-founder issues. By making it clear how decisions are made and who is in charge early, you decrease the likelihood of a founder blow up. This is separate from how you divide equity ...
If all the shareholders are employees and the CEO has a minority share and the other employees have a majority, then they can force the CEO out fairly easily. That kept things civil, in our case.
Just because everyone has an equal share doesn't mean the CEO needs to build consensus.
Again, you are right, to a degree, but even if all employee founders were fired, they could band together, in the situation being discussed, and toss the CEO. That changes the psychology of the situation.
If they other co-founders own more than 50% of the equity that's a very legit thing and they can call a board meeting instantly and make mega changes including getting rid of the CEO.
Moreover - in the early stages among founders there has to be at least basic consensus or you're dead. Otherwise there is literally no team.
The CEO should be given more leeway, but it's not always so clear either. There's a reason the others are 'co-founders' and not 'first employees'.
This is clearly the key. (I wonder how much of it is luck, and how much a myriad of other factors.)
> or use ethically dubious methods to get ahead
Some do, but without being in the right place at the right time, it won't lead to success.
There are many times over the last 30+ years that I've thought if I did X, I would have a lot more money (personally) than I do now, but I never even considered X because I wouldn't have been able to sleep at night.
My Mr. X clearly had no such restriction.
i would never do a split like that again, and would not recommend it. i still can't watch Silicon Valley because it reminds me of those times haha.
100% agree with team needing a President or CEO. to expand on that, co-ceo's, that's bonkers.
My direct observation is that capital is one of the least critical things someone brings to a software startup at day 0. A nontechnical CEO that brings funding is not entitled to special endowment; that's their job.
Yes, the sales side of the business is critical. So is the engineering side, and the product side, and the support side. In a startup everything is critical. Which is why an equal share is the only reasonable approach; otherwise you're arguing over which of your organs is more important, your heart or your lungs or your liver.
If your founding team thinks "sales is less important than engineering" and thus deserves a smaller share (or vice-versa), you're already set up to fail. I went through this once with a CEO with an outsized belief in his contribution and I consider the lesson learned.
I'm sure there are plenty of exceptions to the "equal share" rule, like very junior engineers - but you might want to consider whether that's a good idea for a startup.
I look at this from the other side, btw. In my current startup I had the moral authority to demand an asymmetric split, but I chose an equal split anyway. We're going to be at this a long time. Day 0 is a dumb time to get greedy.
Or look at it this way: The other founders in your company got greedy and missed out on an opportunity to bring you on board, and your contribution may have been the difference between success and failure. That's their fault, not yours. I hope they've learned their lesson.
One of the biggest companies in history is a major counterexample to Gil’s argument and deserves more than a footnote about equity split at IPO.
I tend to believe that people that spend a lot of time advertising themselves on the outside, do not spend a lot of time managing things on the inside of the company.
https://www.amazon.com/Slicing-Pie-Funding-Company-without/d...
The idea is to dynamically adjust equity based on how much everyone is contributing.
Some people report good experience using this dynamic split method:
https://cofounderslab.com/discuss/has-anyone-used-the-slicin...
With that said, I am sure there are a lot of different methods that could work depending on the people involved, it's not as if there is only one "right" way to do it.
"The most successful" being defined by some metric (public valuation, exit price etc.)
Then look at all the companies that qualify by that metric, and then see what % of them are unequal equity splits.
I definitely agree that there should be a clear leader who makes the call. But the argument for an unequal equity split feels extremely weak.
See: https://payne.org/blog/dividing-founder-equity-in-the-very-b...
TL;DR: (a) figure out ratios of ownership in the beginning (vs absolute percentages), and (b) use simple "buckets" of contribution to figure out the ratios should be.
For example, the two founders that have been working on the idea for 6-12 months may end up with more equity than the next "founder". Or a part-time (e.g. academic) co-founder may get a little less.
the problem is when folks behave secretively, tilt too far towards selfishness, and lose respect for others.
—- George (The Startup Farm)