What’s the Split? How to Fairly Split Startup Equity with Founders and Early Team Members.
Note: When determining your startup equity structure, we recommend consulting with your lawyer.
One of the major ways a startup can attract top talent is by offering company equity. From the perspective of a founder, startup equity can be a powerful tool for recruiting and retaining talent, especially when competing against large corporations that can often offer higher wages and additional benefits.
There is no “one size fits all” strategy for distributing startup equity. Determining how to split equity among investors and later employees is fairly straightforward, but determining the equity split among founders and the earliest employees can be tricky. You can learn more about dilution and distributing equity with investors here.
Even the most experienced leaders struggle with the issue of fairly dividing startup equity. To help alleviate the stress, we laid out a few thoughts for determining how you want to split your startup equity. Equity can come in different forms, but for the sake of this post we will generally be referring to stock.
Splitting Startup Equity with Founders
Splitting startup equity among founders is one of the first tough decisions a founding team will make. If you do a quick Google search for how to split startup equity among founders, you’ll get countless different ideas and suggestions.
Commonly, you’ll see lawyers, founders, and VCs recommending to split depending on a number of different qualities. We’ve listed a few examples below:
- Experience – Do you have experience running and scaling a successful startup?
- Expertise – Do you have knowledge in the specific market you’ll be operating?
- Ideas/Intellectual Property – Did someone come up with the original idea for the company and turn it into intellectual property?
- Time – Are you dedicated to the company?
As investor and found Mike Moyer puts it; “The right way to think about equity is to think about a startup as a gamble… The value of each person’s bet is always equal to the unpaid fair market value of his or her contribution. Each day people bet time, money, etc. The betting continues until the company reaches break even or Series A.”
On the other hand, Michael Siebel, CEO of YC, offers a controversial take for splitting startup equity: equal equity splits among co-founders. Michael shares many reasons why it makes sense to equally split your startup equity and not use the factors listed above.
The more equity, the more motivation. The more motivated your founding team, the higher the changes for success. Another reason Michael shares is the idea that if the CEO or Founder does not value co-founders, no one else will, either. For example, if co-founder equity greatly varies, this suggests to your investors that the certain co-founders might not be as valuable or qualified. As Michael puts it, “Why communicate to investors that you have a team that you don’t highly value?”
Equity for Startup Employees
Once you have determined your equity split among founders, you’ll be able to use your remaining equity and option pools to attract top talent. If you want your earliest employees to be your most impactful, creating an emotional attachment to your startup’s success is vital. Your first hires are key, and creating the perfect split between their salary, equity, and benefits can be difficult. There is no magic formula for splitting startup equity among your earliest hires.
Leo Polovets, VC at Sosa Ventures, studied job postings and laid out the typical equity depending on what number hire the person is:
Splitting startup equity with your first hires will often require negotiations, and the process will vary from employee to employee. Once you start hiring outside your core team, you’ll want some type of predictable system in place for sharing equity.
There is no right answer for sharing startup equity with co-founders and early employees. It is more art than science in the earliest days. Just remember to be fair as you’ll be spending every day with these people. A solid relationship among the founding team will greatly increase the chances of building a successful company.
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