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Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and rai

Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and raised a significant Kickstarter funding before my co-founder committed 100%. Could you comment more on issues you see this brings down the line and how this plays out? Also, does this conflict a little with your next point about clear leadership?

hga 13y ago
Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years? Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....
- technotony 13y ago
  Obviously want to optimize for success. What I'd really like to know is what are the pitfalls that non-even equity split can bring, so that I can watch to see if that's happening and potentially mitigate.
  - hga 13y ago
    "Obviously want to optimize for success." No, you're optimizing for "fairness" as you see it, for yourself. This split will do nothing good going forward ... unless, of course, you will internally burn at the idea of your cofounder getting more than what you view as his fair share. Which should tell you something, and brings me to: The pitfalls are inside people's heads and hearts, so I think you'll find that strategy to be particularly difficult to execute. The cofounder should be obvious; others who, especially down the road when the starting details are lost in time, will ideally see you two working just as hard as each other, and wonder why the split is so uneven. I don't see anything good that can come from that.
    - technotony 13y ago
      This data somewhat contradicts that however, as it says unequal shares are correlated with higher initial funding valuations (obviously that's not a perfect metric) http://siepr.stanford.edu/system/files/shared/pubs/hellmann%20and%20wasserman%20-%20nber%20working%20paper%20-%20'first%20deal'.pdf http://siepr.stanford.edu/system/files/shared/pubs/hellmann%... I'd really like to see the data which suggests equal shares lead to better success outcomes (maybe YC has this?).
      - tptacek 13y ago
        My guess is that the numbers would swing sharply in the other direction if the study accounted for survivorship bias.
  - tptacek 13y ago
    Unequal splits are an invitation to resentment and the degraded communication and problem solving that comes with resentment. If you've done a bunch of startups, you've probably had the experience of having a harrowing argument with cofounders, and the realization of how easily your company can disintegrate based on nothing more than silly interpersonal conflicts. Some people, myself included, take from this the lesson that you should rig your startup to minimize these issues as much as possible. Another reason to avoid unequal splits is that they often presume you can see into the future. Who's to say that whatever you did to "earn" an extra 10% of the company isn't going to be more than offset by something your cofounder does later?
johnrob 13y ago
I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.
- tptacek 13y ago
  5% is an enormous amount of equity to grant for anything. Recruited executives might get 5%. First technical hire often gets that.
  - 7Figures2Commas 13y ago
    > 5% is an enormous amount of equity to grant for anything. No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation. The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation. In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%. Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
    - tptacek 13y ago
      5% is a gigantic grant for an employee. I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".
jl 13y ago
This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)
- orky56 13y ago
  Should the majority equity holder be the "clear leader" who is the final decision maker?
golergka 13y ago
There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.

hga 13y ago

Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years? Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....

technotony 13y ago
Obviously want to optimize for success. What I'd really like to know is what are the pitfalls that non-even equity split can bring, so that I can watch to see if that's happening and potentially mitigate.
- hga 13y ago
  "Obviously want to optimize for success." No, you're optimizing for "fairness" as you see it, for yourself. This split will do nothing good going forward ... unless, of course, you will internally burn at the idea of your cofounder getting more than what you view as his fair share. Which should tell you something, and brings me to: The pitfalls are inside people's heads and hearts, so I think you'll find that strategy to be particularly difficult to execute. The cofounder should be obvious; others who, especially down the road when the starting details are lost in time, will ideally see you two working just as hard as each other, and wonder why the split is so uneven. I don't see anything good that can come from that.
  - technotony 13y ago
    This data somewhat contradicts that however, as it says unequal shares are correlated with higher initial funding valuations (obviously that's not a perfect metric) http://siepr.stanford.edu/system/files/shared/pubs/hellmann%20and%20wasserman%20-%20nber%20working%20paper%20-%20'first%20deal'.pdf http://siepr.stanford.edu/system/files/shared/pubs/hellmann%... I'd really like to see the data which suggests equal shares lead to better success outcomes (maybe YC has this?).
    - tptacek 13y ago
      My guess is that the numbers would swing sharply in the other direction if the study accounted for survivorship bias.
- tptacek 13y ago
  Unequal splits are an invitation to resentment and the degraded communication and problem solving that comes with resentment. If you've done a bunch of startups, you've probably had the experience of having a harrowing argument with cofounders, and the realization of how easily your company can disintegrate based on nothing more than silly interpersonal conflicts. Some people, myself included, take from this the lesson that you should rig your startup to minimize these issues as much as possible. Another reason to avoid unequal splits is that they often presume you can see into the future. Who's to say that whatever you did to "earn" an extra 10% of the company isn't going to be more than offset by something your cofounder does later?

johnrob 13y ago

I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.

tptacek 13y ago
5% is an enormous amount of equity to grant for anything. Recruited executives might get 5%. First technical hire often gets that.
- 7Figures2Commas 13y ago
  > 5% is an enormous amount of equity to grant for anything. No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation. The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation. In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%. Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
  - tptacek 13y ago
    5% is a gigantic grant for an employee. I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".

jl 13y ago

This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)

orky56 13y ago
Should the majority equity holder be the "clear leader" who is the final decision maker?

golergka 13y ago

There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.