Don't Be Pied Piper #1 – How to Divide Equity Among Startup Founders

I'm really curious what most people do now-a-days. A long time ago I started a company with 3 friends. We were advised to divide the company basically by shares/points/option. We each got 1 point for each month we were with the company. So first month each of us has one point. Second month each has 2 points. If someone quits then in 6 month it would have been 6, 6, 6, 2 which means the 4 would own 30%, 30%, 30%, 10%. In a year it would be 12, 12, 12, 2. That's 31.5% each for the 3 remaining partners and the guy who left is now down to 5%

At the time that seemed like a great idea.

Then I listened to the podcast, Startup and I hear the Alex Bloomberg offer his partner 10%. "Seriously? You haven't actually done anything yet". It seemed to me he should have used the point system. At best he should start with 2 or 3 more points (or heck even more because he's the "talent") but otherwise given there was basically nothing to the company yet it seemed fair. If his partner puts in the time in a few years they'll be nearly equal.

They settled on some random numbers but it seemed short sighted. Maybe they'd need another partner. The points system seems to work. New partner starts, you decide on some starting points, possibly zero, just vest your points. If it was 5 people who've been working a year and you come on at the end of year 1 then in 4 more years it will be 60,60,60,60,60,48. That's 17% for the 5 originals and 13% for the new partner

The 2nd season had the same issue. Instead of going by time invested in the company they were just picking random numbers. It seems very arbitrary and unfair. Of course maybe the point system is just as unfair to some.

Ultimately, equity math is less about math and more about psychology. Startup success is binary so the fine details of the split end up not mattering at the end of the day. What's important is that the process you use to assign equity leaves everyone feeling it was more than fair.

You could start with a team of talented people and arrive at the same equity numbers via two different processes and one will result in a billion dollar company and the other a million dollar company because the founders are motivated in the first and discouraged in the second. What's ideal is that each founder believes they got way too much equity and is glad to be a part of the team. Put in that perspective, dicking over 5% isn't something that should be encouraged.

This is why founder chemistry is so important. If you're considering co-founding a company with a person, run this hypothetical in your head: You have both just sold the company for a billion dollars and you get 70% of the sale and they get 30%. Are they happy that they're now worth 300M and even happier than you're worth 700M or are they jealous that you got the way bigger share of the pie than they did? If it's the latter, run away immediately, there's no good outcome possible there.

The live chat button on the website doesnt seem to be working. I wanted to ask if the site hosts lawyers outside of the US in places like the UK for instance as I'm currently looking to start a conversation with a legal expert on some startup matters.

This is a really important article!

I've found that a lot of my fellow founders have faced trouble when going to raise money from investors simply because they either looked uninformed or careless when dividing up equity!!

Make sure you don't fall into that trap.

Dividing up equity is an ugly issue, because sometimes it's more about availability of talent, contract clauses, time (4 years is not a lot of time). Best to get it right the first time.

All feedback from startup founders welcome!