As an advisor to new startups, one of the number one questions I get is how should equity be divided up amongst cofounders? That’s a loaded question with a number a variables to consider before you can arrive at an equity split that’s fair to both of you.
In this post I’m going to give you a few key things to consider when calculating a fair equity split between you and your co-founder.
How Important Are Your Positions?
The first thing to consider is the importance of the positions you will both be playing in the company. I believe top executives have more skin in the game and thus should have a greater equity stake compared to non-key executives.
As an example, if you will be taking on the role of CEO and your co-founder only wants to stay on as a consultant, then it’s fair to say you deserve a greater stake in the company.
How Much Have You Each Contributed To The Team?
When dividing co-founder equity you have to consider more than just “What will I be doing going forward?“, ask yourself “How much have I contributed to this team already?”
If it’s agreed upon that one of you has put more work into growing the startup than the other, or has contributed more financial capital, then it’s fair for that person to be rewarded with a greater equity stake. This includes a mentor.
Who Came Up With The Idea?
I believe that being the “idea person” is worth something. Whoever you came up with the original idea for the start up should be rewarded with a premium stake in the company.
Let’s say, for example, that you and your co-founder are equal in all respects except that one of you came up with idea for the startup. That would turn a 50/50 split into a 60/40 split in favor of the idea person.
How Much Did Each Of You Give Up For This Startup?
Getting a startup off the ground means sacrifices for everyone, there’s no doubt about that. However, sometimes one party scarifies more than the other.
For example, one of the co-founders may have given up a six figure salary and guaranteed pension to pursue the startup, while the other co-founder may not have had a steady job at the time.
It’s fair to consider the income that a founder was accustomed to before deciding to give up what they had and co-found the startup. This can, and should, affect how much equity each of you get. Employees will get considerably less but it still may be needed to get them to join your startup.
Still Not Sure What To Do? Try The Equity Calculator
If you’re still not sure how to divide up the equity, here’s a tool that may help called the Startup Economics calculator. This tool will show you how every financial decision you make will affect the amount of money you bring in. This calculator walks you through a variety of events that can affect the division of a startup’s equity.
The Startup Calculator can help co-founders understand the ultimate financial outcome for each party by displaying how much each of you would make off a particular deal. It will also show you how that would change by altering the terms of the agreement.