Splitting Equity with your Co-Founder
Written by Josh Melick , 3x founder, 3 exits, acquired 2 companies, raised $40M in venture capital. This is the first post in a three part series on calculating equity amounts for co-founders, employees, and others like advisors and board members.
Picking a co-founder is the first, and often hardest, decision you will make for your company. The analogy is that of a marriage and I’ve found that to be pretty accurate — so don’t take it lightly. Hopefully there’s a few tips here that can help you. Don’t put too much stock in my advice though, I’m divorced, my first co-founder was a greedy ex-VC, my second an unapologetic asshole. At least the jury is still out on the third (fingers crossed, yikes!)
So why is this hard? Building a company is hard work. SaaS companies usually take 7–10 years to do something meaningful. That’s a long relationship. Many relationships don’t last that long or have the intensity and challenges this one will require. And even then, most marriages end in divorce.
For me, I am a very mission-driven entrepreneur. I like to work hard, solve problems, and feel like what I am doing is making a difference. I’d like my partner to share those qualities. I also want my partner to bring a complimentary skill set. I’m technical but more product minded — so that could mean more sales oriented or it could mean true hands on coding CTO. Both are valuable and I’ve had both in the past. For you, depending on your market, you may want someone with industry connections, design skills, etc. Like any good marriage, a mix of similar interests and complementary personalities tends to be the right recipe.
Someone needs to be CEO
This post is about splitting equity, so let’s move past the dating game. It’s time to get married. Except we need terms. Someone is gonna be CEO. Maybe it’s you — it was your idea after all, right? Or do they have more experience? I’m not solving this question for you, but ultimately there needs to be a CEO. Investors want to know who that is. Co-CEOs signal unresolved conflict. Don’t start there. This is important, as being CEO will influence equity.
Doing the Math
Besides CEO, there are other things that influence equity splits. Sure you can go with 50/50 (or 33/33/33 if there’s three of you). That is kind of the default. But default is not always best. Nothing’s ever equal, one of you will do more, it’s just the reality. Let’s try to line up equity accordingly.
Who’s idea? What role is each taking? What is the experience level? Who will shoulder burdens? What is day to day gonna look like? What else is each bringing to the table? Connections? Money? Deals? Technology?
Let’s sidenote for a second. What’s the difference between an employee and a founder? Is it just timing? No, it’s not. Sometimes your co-founder will join later than other employees. It’s about ownership. And not of the equity type, that comes later. Hence those questions above. The real test for equity split is about who will be the owners of the business as it moves forward. (forward is a key word here).
Above, we established that an equal split is the top end — so then the bottom end would be what equity does an employee get? Well, if the CEO isn’t a founder, they often get 5% of the company. An important engineer or star employee? Like 1–2%. (more here on this topic) Obviously stage matters a lot here, but also not as much as you think. These numbers might double at an early early stage, but not 10x (And I’ll do a future post on how to calculate equity for employees).
I also want to take a second to debunk one of the most common arguments. “But it was my idea, I’ve already spent one year on this, and I’ve created this great plan — shouldn’t I get way more for my [past] hard work?” Well, honestly, barely. Is the business up and running currently? No? Hmm. Still really just an idea? Well then that doesn’t count for much. It’s forward motion that matters. It’s the next 7–10 years — not that time in hobby land. It doesn’t account for zero, but it’s less than other future burdens.
With all this in mind, here’s some numbers I suggest starting with. All my numbers here assume out of 100% PRE OPTION POOL AND INVESTMENT — that dilution comes later:
● Your idea, you’re the CEO? You should get 60%-70%. Maybe even a touch more, but be careful, you don’t want to overdo it and end up with too much equity going to just “an employee.” If they are just an employee, treat them as such.
● Your idea, but they are the CEO? Well, aim at that 40% range then — not sure you deserve much more than that.
● It’s as equal as it can be but she’s CEO? Okay, maybe a 55/45 split. But just maybe.
● The “big-game talking” co-founder — who is probably not going to put in the extra hours? Brings a lot of value to the table but is not really committed? Or playing the field with 2–3 companies? Well, let’s think positive for a second — but make sure we have our downsides covered. If they can really bring that value — it’s worth something. 5–10% sounds about right
— but it is too low if they will work there day-to-day. Then 20/50/30 is more appropriate.
Vesting is Critical
Hugely important point here: MAKE SURE FOUNDER EQUITY VESTS OVER TIME. And for a long time. At least the standard 4 years — but 5–7 years is not unreasonable. Add a cliff. With Broadly, we did a 6 month cliff but “credited” for the last 3 months that we were working without an agreement. Those numbers were too short — but the vest period worked for me at the time. I lost one co-founder in the first 90 days and he rightfully got zero. In another 30 days it could have been more ugly. Give yourself that 6–12 months for a real cliff.
For my scenario above with a “value-add founder” you aren’t sure will stick — vesting is key. Longer cliff. Longer vest. If they work for it, great. If not, no foul, equity goes away (make sure you do the math on that too, know that without that equity the split reduces to the right numbers for the founders that stick around).
As I re-read this, I think I’m being too generous. If you’re the CEO, your idea, you’ve got the experience, these numbers may be even more slanted. But then again, if that’s you, you’re not sitting here reading my advice. For new founders, err on the side of generous. I think it’s a better play. But whatever you do, don’t settle for equal!
Do Therapy. Seriously.
One quick point here: relationships are hard. Invest in them. Do coaching, do group work. It’s worth it. As soon as you have a little budget, get a coach or someone to help. I learned the most that way. Get in peer groups like YPO, EO, etc. You’ll learn a ton from your peers.
Back to the marriage analogy: sometimes it’s expectations not matching reality that leads to demise. We could even change our expectations around the construct itself, as many people believe that marriage is not for a lifetime, but for a season. Finding a great co-founder that serves you well through a certain period may be enough. Through that lense, all of this could be easier. And more true for your co-founder than your spouse. But only if you set the split and vesting accordingly from the beginning! Good luck!