Splitting Equity Among Co-Founders

One of the first big questions that co-founders have with each other is how to split the founders’ equity. Many teams simply decide to quickly move past the questions by deciding to split the equity evenly. However, myself and most commentators believe that this is usually the wrong decision. Splitting the equity evenly means that each co-founder is contributing equally to the company; however, contributions are rarely equal . Co-founders need to sit down and have an honest conversation about how to split the equity, based on what each founder is contributing. There are a number of good reasons why co-founders should have this conversation at the beginning. One, the equity split conversation is a difficult one, and if you cannot or will not have this conversation, what are you and your co-founders going to do when you need to have a tough conversation about something you can’t ignore or easily compromise on? Second, because co-founders usually do not contribute equally to a company, the co-founders who contribute more may begin to resent putting in more of the effort for not a comparable share of the founder’s equity. So how do co-founders decide how to split up equity? Legal Hero has created a handy spreadsheet/calculator that can be used as a starting point for discussions, by allowing co-founders to mark down each’s contribution or anticipated contribution to the company. Of course, the split generated by the spreadsheet should be used as a basis for, and not the end of, the conversation about equity — the percentages can and should be tweaked based on what the co-founders think is fair. Everyone should think the split is fair before moving on, because if you can’t come to full agreement on that issue, your prospects for being able to come to agreement on other issues is more remote. Factors that co-founders should consider when splitting equity include: (1) who is going to be the primary co-founder or CEO and which other co-founders will be performing executive-level roles (i.e. treasurer/CFO, COO, CTO); (2) who, if anyone, will be working full-time on the business; (3) who came up with the idea, and who has been or will be validating the idea; (4) who can or will be raising outside capital; (5) who, if anyone, is an expert in the industry or has contacts in the industry; and (6) who, if anyone is critical to launching the product or generating revenue. Additionally, co-founders should also consider what, if any, capital each is contributing to the company. Capital includes not only cash, but also intellectual property, equipment, or office or retail space.

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