How to Split Equity Among Co-founders
Fundraising — 6 min read
Splitting equity between co-founders is probably one of the toughest decisions you will face early in your startup’s journey. It’s absolutely critical not to avoid this topic, however, even if it might require a potentially uncomfortable discussion with your co-founders.
Why Is Equity Split Important?
Research by Noam Wasserman, a professor of business and entrepreneurship who has taught at universities such as Harvard Business School, USC, and Stanford, claims that 65% of startups with high potential ultimately fail as a result of co-founder conflict.
In order to avoid this conflict, there are many different factors that need to be taken into consideration. There is no “correct” way to approach splitting equity among co-founders, and many of the world’s most successful businesses adopted very different approaches to equity split early on.
For example, Airbnb’s co-founders opted for an even equity split of 33/33/33, while Dropbox’s co-founders chose a dynamic but nearly equal split of 51/49. On the other hand, Microsoft’s original equity split between Bill Gates and Paul Allen was 60/40, and the initial split between Apple co-founders Steve Jobs, Steve Wozniak, and Ron Wayne was 45/45/10.
Clearly, there are multiple paths to success when it comes to splitting equity. That’s why it’s so important to put in the time and effort to figure out what kind of split makes the most sense for your team rather than choose the quickest solution and move on. In another of his studies, Noam Wasserman reported that out of approximately 6,000 startups he observed over the course of fifteen years, the ones that rushed into an equity split decision without enough discussion were three times as likely to experience significant tension among co-founders down the line.
Besides avoiding conflict, a decisive and carefully-considered equity split can help put investors at ease. VCs are almost certainly going to want to know how you’ve split equity among your co-founders, and it will reflect well on your startup if you are able to clearly explain your reasoning for splitting equity the way you have.
Popular Equity Split Arrangements for Startups
There are three main categories within which most startups’ equity split decisions will fall:
If you determine that some co-founders are bringing more to the table than others, you might opt for a dynamic split that assigns each co-founder a percentage of equity proportional to their contributions. In this case, there is usually a senior co-founder who receives the majority of the equity and one or more junior co-founders who receive a much smaller share.
Another method of splitting equity dynamically is to give one partner slightly more equity than the rest. The difference could be as little as a single percent, but often it looks more like a 60/40 split or a 30/30/40 split. Some founders’ reasoning for using a controlling partner model is to avoid the possibility of deadlocked decisions by empowering a “tie-breaker.” Sometimes, this model just makes the most sense according to each member’s contributions.
An equal split is the most common type of equity split. As the name suggests, an equal split divides equity evenly among co-founders without regard for individual contributions.
Open Communication Is Essential
The very first step of your equity split consideration should be a conversation. It’s easy to start assigning value to each person’s efforts according to their experience levels, financial contributions, or skill sets, but a candid discussion will likely uncover additional factors—factors like risk tolerance or personal long-term goals that may not have an obvious correlation to equity now but can strain co-founder relationships later if they are overlooked.
Some of the most important issues will probably come up naturally in your conversation about equity. Once your team starts analyzing how to fairly divide ownership, you will likely start asking yourselves questions about each co-founder’s role, such as:
- Is there one co-founder in particular who thought of the original idea?
- What kinds of skills or expertise does each co-founder have to offer?
- How much of their own money has each co-founder invested?
- How much experience in the relevant industry does each co-founder have?
However, answering these questions is not as straightforward as it might seem, and taking them at face value can result in a hasty decision that seems fair now but builds resentment years in the future. Your negotiations should dig deeper and address more nuanced considerations as well, such as:
The value of ideas
Some people will expect credit for ideas alone, while others might feel that technical contributions should be valued more highly than creative ones. Either way, it’s important to establish how the group values conceptual vs. technical contributions before proceeding.
The role of your CEO
Some people assume that a company’s CEO should automatically receive the largest share of equity. After all, they’re in charge of the whole operation, right? In reality, the role of a startup CEO is not that simple.
If the co-founder who serves as CEO was appointed to that role because of their relevant experience and clear leadership skills, then it may be appropriate to give them the largest equity share in a dynamic split. However, a co-founder that simply acts as a de facto CEO while the business is in its infancy may end up transitioning to a different role before long. It’s important to look ahead, not make decisions based solely on each co-founder's current (possibly temporary) position.
You should also remember that your team ultimately consists of people who are more than the sum of their business contributions. Different co-founders may be at very different places in life’s journey, have different financial situations, and/or have different long-term personal goals. These personal considerations should play a part in determining what kind of split is fair.
The Case For an Equal Split
Splitting up equity based on how much each co-founder has contributed thus far is tricky because your business is still at the starting line; it’s common for startups to take up to ten years to build significant value. Most of the work is still to come, and it’s likely the balance of contribution will shift over time, leaving you with a dynamic equity split that no longer reflects the way the work is divided up.
An equal equity split is also great for morale. The early days of a startup are hard, and the unfortunate truth is that most startups fail. If every co-founder is given the same percentage of equity, it can result in a team dynamic where everyone feels equally valued and respected, which could be the extra motivation that spurs your team to success.
An equal equity split also indicates to potential investors that you have an all-star team. If some co-founders have a vastly smaller share of equity than others, investors might question whether those team members are necessary at all, which reflects poorly on the overall quality of your team.
So, unless there are obvious indications that different co-founders deserve different shares, an equal split is probably the smartest choice.
The Bottom Line
Even though an equal split is often the best choice, you should still set aside plenty of time for an honest discussion with your team before you finalize your decision. Open communication and thorough consideration are the only ways to determine which style of equity split is right for your startup’s specific circumstances.