How to split equity among co-founders - the right way

Before you look to partner up. Understand how it works first.

Businesses standing on poor ethics fall to the ground. Every Single Time.

I have nothing against finding a co-founder. That’s one of the best things you can do for yourself and your business. You need to partner up with someone who can compliment you. And make this journey fun!

Terms

Here are some terms you should know before diving into this

Vesting & Cliff

Common vesting setup: 4 years of vesting with a 1-year cliff.

Let’s assume you own 40%.
Under any circumstances, if you were to leave the company within a year - you get nothing. The point is risk prevention.

You can’t afford to have one co-founder quitting after 3 weeks.

Alright. Let’s assume there are 2 co-founders involved. John & Tom.

John

Co-Founder 1 - Non-tech - Sales/marketing

Tom

Co-Founder 2 - Tech - Designer/Developer

Focus on ethics

Understand the word “partner”

I can’t emphasize the word “partner” enough. Make sure you partner and not deceive. You’re not fooling anyone.

You HAVE to give up control. A partnership with a single source of decision power - is a job. With two - it’s companionship.

If you want to have 100% control. Don’t partner up. Simple as that. Get some interns instead. Hire people. There's nothing wrong with any of that.

Divide Roles & Stick to it.

Here’s a scenario I’ve seen many times.

John partners up with Tom.

When the task at hand is designing. John should have almost zero contribution to the decision-making. He can shoot ideas. He can convince Tom. Sure. But he cannot force a decision that overrides Tom’s.

It’s so painful whenever that happens.

You’re not Steve Jobs - Don’t imitate things he did. Be yourself.

Here’s another scenario that’s very prominent.

John forgets his role and gets very involved in product development. So much so that his contributions lack behind. And the result? Failure.

What ends up happening is - you have zero customers. But an incredible product. Tom realizes that he’s contributing 80% to the business - while John owns 80% of the business. Tom reduces his efforts subconsciously. A few months pass by and now Tom is doing a heavily underpaid job. Because 20% of $0 is $0.

Here’s your step-by-step guide.

Step 1:

Start at 50-50.

John: 50%
Tom: 50%

Step 2:

Who is funding the business?

• Paying bills

• Salaries

• Investments

For SaaS - investments will be a couple of bucks. Don’t put too much emphasis on it.

If your business has no revenue. And say John is paying Tom’s salary. Then it will depend on Tom’s capabilities. Do you have a business without Tom? If the answer is “No. Tom is important”.

Then John gets a minor equity raise - depending on the stage you’re at. How much salary is he paying?

Let’s assume John is managing all the financial stuff. It could look something like this (only an example):

John:

• 57% equity
• Pays $3k/mo - To Tom

Tom:

• 43% equity

But if you won’t have a business without Tom. You can consider paying him a salary with an even smaller raise in your equity.

Also, consider. How long will you be funding them? Will your company generate revenue soon?

Step 3:

Weighing the Idea

Scenario 1:
Is there a competitor with a similar product/idea? Give 0% attribution to the Idea guy.

Scenario 2:
There’s nothing like this out there. Not even close! + The Idea seems promising to both of you. Give it 1-2%

Yes. It’s a small thing. Don’t make it sound big.

There’s no idea in the world - that deserves over 4% equity. Ideally, it’s 0%. Execution is everything.

Step 4:

Weighing skill-sets

John’s skills include: Marketing/Sales

Tom’s include: Designing & Development

Are you building a technical product? Does that rely heavily on having an efficient & performance product? Give Tom a dime.

Are you building a generic product that relies heavily on the reach factor? Give John a dime.

Step 5

Weigh experience & proven records

Does John already have substantial leads and a high-quality audience network? Does he have proven sales/marketing records? Put some dimes in his pot.

Can Tom design powerful user experiences? Put some dimes in his pot.

Have any of you started a successful venture earlier? Measure success and weigh accordingly.

Step 6:

Time commitment

Is one of you full-time and the other part-time? Decide on contributions mutually.

Step 7:

Make it legit

Get this agreement down on paper. Make it legal if possible. Don’t “trust” the word. Even if you both have a great relationship now. That doesn’t mean you will forever.

I'm not trying to be negative. But better prepared than sorry.

Remember: It doesn’t have to be perfect. Don’t overstress this so much that you distract from your core business.

Step 8:

Rebalance based on psychology.

Let your co-founder have some skin in the game. You can’t pay them $20k and give them 10%.

Short-term money doesn’t equate to a heavy drop in equity. You don’t want a co-founder who works without complimenting your vision.

Whatever you do. If you’re starting a new venture with a partner. Have a distribution somewhat close to 50-50.

80-20 & 90-10 splits are destined for failure & burnout.

Ideally, I'd keep it between 30 - 70 for each co-founder.

Don’t take over 70%. Don’t take less than 30%.

A few extra points to remember

I always say these things:

Build a foundation so strong. No one can tell who the leader is.

1% of a billion-dollar company is 10 million dollars. But. 99% of a billion dollars is a billion dollars.

And you’re not making that money anytime soon. So don’t be fooled.

Don’t give away shares for small wins in the past. You’re here for the long-term. It will take years. These minor details account for almost zero contributions over the long term.

The lesser the equity - the more it’s a job.

More equity - More motivation. You’re not a part of this business. It’s YOUR business. Huge difference.

You’re not a co-founder if your equity is 10% or less. That’s a trick to “compensate” for your low salary.

The most important thing is that you're partners. You understand and respect each other.

Rest of it comes easy.

Have a good one! Cheers!