equityWhat is the best way of equity division when founding a startup?
What did you take into consideration when dividing equity among members when you were founding your own startup?
Very interesting question. Of course, there’s no really great way to answer this generally, since every startup is different. But here are my thoughts on what factors might be at play in the general sense. Most of this is applicable amongst employees pre-equity-division in general, more than just the founder(s).
How do we define “founder?”
This might seem like a silly point, but it’s important. In the fast-paced world of modern startups, it’s hard to really define boundaries. Who is a founder in the conventional sense, and who just came along for the ride soon after it started? Let’s say your idea is for a mobile app, but you have no development experience. You hire a developer that significantly helps guide you through the process. You couldn’t do it with him, and he’s had a huge impact on the direction your app has gone that will probably make you a whole lot more money in the long-run, but at the same time, it wasn’t all his idea in the first place. You might plan to keep him on indefinitely as the head of development, even as you hire more developers, but he isn’t a founder. So how much do you give him? The same story could easily be applied to many other positions. Do we give equity just for being around for a while? Does implementation deserve as much credit as innovation? Probably not, at least in most people’s eyes, but you’ll have to think about where that balance strikes for you. I bet in most successful startups, there are at least a couple people who came on relatively late in the game but still brought invaluable assets that helped make the dream a reality. How much are people like that worth, equity-wise?
Irreplaceability
I’ve long-held that equity should be indicative fundamentally to a person’s individual and personal worth to the company. Sounds obvious, right? Well, it’s easier said than done. It’s really up to a case-by-case decision of how important someone really is to a company, but I think a good starting point when making that decision is how replaceable they are. If the person dropped out now, would the company survive?
Market worth
That brings me nicely to market worth. Part of the job of a pay at any stage in a company’s development is to keep employees from going to work elsewhere. If you have a founder who’s receiving phone calls frequently from Google, Facebook, Microsoft, and other companies looking to recruit them, that should tell you two things:
So assess the likelihood of your employee or cofounder finding a better job somewhere else, assess how detrimental that would be to your business, and set equity accordingly.
Risk assumption
This one is more based on founders specifically, although it can still be widely applied. It comes in part from another great question about equity: https://startups.stackexchange.com/questions/184/is-employee-value-derived-from-their-equity. As you’ll see if you read that question, this person scraped by the senior year of college, and had a cofounder drop out completely. As I agreed in my answer to that question, I think that deserves a lot from equity. So think about that, too: what risks have people put in? Where would people be if your company fell apart? This also has a couple of benefits:
Those are the main points I can think of at the moment. I might well come back and edit this tomorrow, as it is starting to get a little late for me to be thinking about all this stuff now, but to reiterate: when evaluating an employee’s potential equity amount, think about their necessity at your company and whether it could be where it is without them, think about what competition you may or may not have to keep them in your business, and think about what risks they have personally taken on to see you succeed.
Yet again, I’m sorry I can’t really be more specific than that. I can’t really give a good answer that says “just split it all up equally,” but I hope these ideas can help spark a productive meeting to decide on the right division.
It is all on a case-by-case basis but here is the criteria I would use.
If you have a founder that is also working a full time job, I would normally drop them as a founder all together. From experience this never works.
Not recommended at all to give a 50/50 split. Someone should always hold the upper hand.
In determining someone’s worth to the company some say are they replaceable or not. I disagree with that, everyone is replaceable in a start-up but the key is how much would it take to find someone else like them.
If they come with a large network and contacts in the industry that get you sales and investors, it would be very difficult to find someone like that to work for you, for most likely a reduced market rate, or even full market rate.
If you are an experienced developer, unfortunately you are the most replaceable of all. Just post a job for a developer and it will only take you a week - few months (depending on location) to attract someone with sufficient talent. Developers are even actively looking to join start-ups at reduced market rates now.
If you are the person who had the idea, unfortunately I don’t see that counting for much at all, it is always about execution and continuous refinement of the idea into a vision/mission.
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