More on splitting equity 50/50 or not

I think this explains very well why in my situation with my co-founder, I don't feel like anything but 50/50 would work, but yet I still agree that such a split is inherently risky.

While my co-founder and I have the benefit of knowing each other well and working together for twelve years, the strength of that relationship would make it impossible for one of us to have an overruling power.

We do have sectional overrules, however, where as "CEO" I have certain areas that are "mine", and as "CTO" there are areas that are up to him. But neither of us can overrule on the bigger questions like selling, shutting down, moving to the Bay Area, etc. It's not the 50/50 that prevents that, it's the pre-existing relationship. No differing equity split would remove the damage that unilateralism would cause.

So I don't think we ever had an option on how to split. But that's not the same for everybody.

I wouldn't start a company with someone where the relationship wasn't based on fairness. If I don't trust my potential co-founders enough to share the company equally, they shouldn't be my co-founders.

EDIT: s/your/my/, s/you/I/ ... my personal position may not be best for you.

A key point made that's relevant to a many other parts of a startup is this: It depends.

People want simple answers to questions that are actually complex. In this case, it's not that it's incredibly complex but that there is no ONE right answer (50/50 or not 50/50). (At least, this is my humble first-time-entrepreneur take on the matter.)

Furthermore, everyone has their own bias and point to their own anecdotal situations as proof that either 1) they are right or 2) the other person is wrong. And yet they don't realize that that both cases can be true (that is, their solution was right for their situation and the other persons solution would've been wrong for their solution but right for someone else's).

In my case, 50/50 (or even split) would've made sense early one when I first started. And this is what I was aiming for. But, as time went on, it became apparent that I would be leading this startup by myself. As time went on, 50/50 just made no sense since I was putting all my time/effort/ideas into the project, full-time.

These days, I would never accept 50/50 even if that other person is a friend (mind you, I've been working on my startup for over a year and have a live product and users). Fairness, in my case, isn't about 50/50 but giving a fair share.

I think the author conflates fairness with equality and inequality with self interest.

You can be fair but unequal and unfair but equal. Also, just because you might be getting the smaller share of an unequal deal does not mean you aren't still serving your self interest.

A good example you can cite is Bill Gates and Paul Allen. Despite both making billions, the recent publication of Paul Allen's autobiography shows how equity impacted their relationship and friendship (and still does to this day). Whether Microsoft would have had the same success if they had been 50/50 is another question.

Thanks for writing this. I know of several people who have been trying to vocalize their support for 50/50, and you nailed it with self-interest vs. fairness. Ultimately, the decision should be made in the company's best interest, and not either of the co-founders, resulting in the best long-term results for everyone.

Paradoxically, if one's self-interest is not aligned with that of the other cofounders closely enough that the potential long-term benefits of an even equity split (e.g. flexibility to pivot without redistributing equity and building the sort of consensus based decision making process required to maintain founder control following significant outside investment) outweigh the short-term personal benefit, then an uneven split is more likely to move those self-interests further apart rather than to align them more closely. In other words, if your self-interest isn't best served by your cofounder's success then why have a cofounder?

We had a slightly different approach to solve this problem of fairness vs. (encouraging) self-interest:

Anyone who contributes and sticks with the project till the end, has a stake equal to number of hours put in multiplied by number of users/sales that resulted in (divided by everyone's hours of course). Anyone who contributes but doesnt stick till the end i.e. raising capital, doesnt get a stake but gets compensated at twice the market rate for that skill (when we raise capital).

I think it depends a lot on what it is that you want your company to be and how many people you're talking about. Also, there is a difference between wanting equity for control or equity for getting a share of the profits.

With 2 people: I think either you have a 50/50 split or you might as well have 99/1 or even 100/0. Anything more than 50/50 means one person has effectively total control. Thus, why pretend it's anything other than a dictatorship in that instance? If you both want control, you need 50/50.

If it is about making money, then in place of an equity stake, you can have a revenue sharing agreement that would provide a % of revenue or profits or even a % of whatever the company would get bought out for. The amount each person gets in that instance could vary a lot more based on contribution or whatever "fairness factors" made the most sense to both parties.

The point is, control and profit sharing are two separate issues that often get lumped into the equity discussion when they don't have to.

With 3+ people, I think the same rules tend to apply. I think for sake of simplicity it makes the most sense for smaller (non-VC backed companies) to split equity evenly among the founders or have a single person who has 100% control. Then, do revenue/profit sharing amongst everyone as is deemed "fair".

If you are VC backed, well that's a different ballgame all together.

What's it matter if you raise large amounts of $ - odds are the VCs have true board control or at least blocking power.