How to Split Equity Among Co-Founders?

“Customers will never love a company until the employees love it first.” – Simon Sinek

A Co-founder is often called an initial employee of a startup or an idea. Co-founders are like a working motor that boosts an engine to come into a state of motion. They know how to suitably execute a new plan benign for a business. They possess important skills or knowledge needed to realize an idea. Starting up a business is no piece of cake for everyone, it requires some intellectual and operational skills to formulate and execute the plan and an owner cannot do it by himself. Most of the time they need a co-founder for that purpose who acts as a protagonist who heeds all pros and cons of taking further steps to move on with an idea and a proper skillset keeping the vision of the company in mind.

What is the distinction between a Founder and a Co-founder?

A founder is generally a person with an idea who may or may not have the proper skillset, adequate finance, or human resource. On the other hand, a Co-founder is someone who bridges the gap between an idea into a running business and one who accompanies the founder to project a vision and business planning.

Co-founder Agreement

Now every co-founder delivering his/her services in a business demands something out of it which can either be a part of the company (Equity) or a salary that is based on mutual agreement between an owner or a co-founder, this agreement is called Co-founder Agreement. It is the agreement between the founder, owner, or co-founder of any business/startup which documents their mutual understanding, aspirations, roles, responsibilities, and other relevant terms and conditions, to avoid future conflicts.

Now, one of the most difficult decisions that you will have to make while onboarding a co-founder is how much equity or part of the company should be given to a co-founder to convince them in the long journey of a successful venture which will be deemed to settle negotiations between them and preventing any cause of disagreements and stress.

How to fix equity which is to be given to a co-founder?

Most founders are missing a couple of key points when diving up their equity.

Here are some of the opinions, which a serious founder should consider while moving forward with an agreement and onboarding a co-founder,

• What’s going to motivate your Co-founders to stick with your company through the years and years and years it takes in order for you to build a large company that has a massive impact.
• Often times the co-founders that you’re speaking to don’t quite understand how much of a time commitment they have to give to the startup if it works, and so as a CEO who’s responsible for figuring out what equity splits.
• Often times you have to think about what your co-founders would want even if they’re not thinking about their own long-term interests at the moment.

  As a great CEO, your first thought has to be not how do I come up with an equity split based on negotiation, your first thought has to be how do I cope with an equity split that’s going to maximize the motivation of my teammates and prevent any stability issues inside the company. For this, your primary mechanism of safety when it comes to giving equity should be vesting and a cliff. So, typically when you give equity to anyone in your company but including the founders, you have to focus on what we called 4-year vesting.

Year Vesting period and 1-Year Cliff

It means that you have to work at the company for four years to actually get that equity stake typically also you have what’s called a one-year cliff which means if you leave or are fired from the company within the first year you get nothing so as a CEO that is trying to make sure you have a maximally motivated team, this is your hedge, four years vesting with a one year cliff is your hedge for you which will be legit and help you get out of any mistrust or breach of contract. If you made a decision that was incorrect about choosing your co-founders as long as you correct it within one year there is no long term harm to the company,

On the other side, because you have that hedge it probably benefits you more often than not to be more generous with the equity that you gave your co-founders not less understanding that the equity is going to create long term motivation to stick with your startup, especially during the times when you are sometimes not working well and almost every startup has times where things are not going well and in this case, CEO will not have to act every day in the bad phase. Given equity stakes itself help your co-founders to be the thing that gets them to wake up in the middle of the night, it gets them to work on the weekends, it gets them to recruit their friends, it gets them to feel like they are the true owners of the company and not just the employees.

If you hit it, it will be far more valuable for the company because your co-founders will be all motivated.

Is it a good decision to split the equity equally?

Sometimes, all things being considered equal is a nice and easy rule of thumb but it can’t be applied always. A CEO should always be considerate about his/her future and the motivation of her co-founders and if you are not really interested in the future motivation of the co-founders if you don’t think you’re gonna need them in the long term then why are you making them co-founders at all?

You should really reconsider who’s on your team if you don’t think they are worth a generous equity proposal or grant.