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Choosing Your Co-Founder and Splitting Equity

November 20, 2019

Choosing a co-founder means choosing an ally in grinding through years of hard work, and is one of the most important choices you’ll make in starting your company. Additionally, once that relationship is established, other big questions pop up. How will you split the equity of the company with your co-founder? What is your plan of action in the event your relationship spoils and one of you walks away? These factors can make or break an emerging company. Luckily, after watching and learning about many founders who faced these same questions, we’ve got some helpful tips and tricks.

 

Choosing a co-founder

 

There are some that treat this hyper-casually (ever heard of co-founder ‘speed-dating?’), but make no mistake; choosing someone to found your company with is not a decision to be taken lightly. Your co-founder should ideally be someone you have an existing, healthy relationship with — hopefully one that’s existed for more than a few years. That way, when things get challenging, which it will, there is a larger bond or respect that ties you two together. This doesn’t have to mean you hang out 24/7, but it does mean there’s a mutual and earned respect between the two of you.

 

Their experience matters, but their aptitude matters more. Of course it’s great to have someone by your side who is an expert at something. But, it’s more vital that they are smart, tough, and calm. Even a highly intelligent co-founder who lacks resourcefulness, or who is easily flappable, may not make for a valuable long term partner.

 

A great rule of thumb is something Mark Zuckerberg talks about commonly in the hiring process. Would you work for your co-founder? If the answer to this is no, you should reconsider choosing them as a leader in your company. You can’t make all of the decisions for your future team, but you can choose the decision-makers. This is a great test to see if you’re choosing the right decision-maker as your co-founder.

 

OK, so you’ve got a great co-founder. How do you split the equity of the company?

 

First off, talk about this right away with your co-founder. Many partners wait as long as they can to have this conversation. Don’t do that. It will only get harder with time.

 

We’ve heard lots of reasons that support a very uneven equity split between two founders. In short, we do not agree with this ideal. If you’re asking yourself, “But what if I had the idea first? What if I didn’t take a salary for a year before my co-founder was brought on?” — our answer is still no.

 

It regularly takes 7-10 years for a company to really blossom. What happens in that first few years isn’t enough to justify an uneven equity split, since most of the work is truly ahead of you. In fact, a drastically uneven equity split can often weaken the core of your company. When your co-founder is getting much less equity than you, you’re telling the world they’re worth less to the success of the company. This can also send a message to investors regarding the confidence you have in your team, and strong team is a huge indicator of a company’s potential for success.

 

We believe in a near equal equity split between founders. This will increase their motivation to do great work, and say to the world that you believe in your team. But this isn’t saying go into an equal equity split with your eyes closed. Things can, and do go wrong. Even if you have done your due diligence in finding a great partner, there are ways to ensure an even equity split doesn’t come back to bite you.

 

Vesting

Establishing a vesting schedule with your co-founder is essentially like pre-negotiating what happens if one of you leaves. It ties your time spent at the company with the amount of equity you receive. This protects and prevents founders or co-founders from walking away from a company with 50% of the equity, after a short period of time. This scenario still happens in new companies, and gives the team a permanent limp. Any new hires or investors watch as 50% of their hard work or money is being thrown to someone who has abandoned ship. Investment deals can easily get lost because of a situation like this. Would you give money to a company if you knew a chunk of your support is going to an ex-team member?

 

There is a common model of a vesting schedule used in the Valley: four years of vesting with a one year “cliff.” So this means, if the original agreement states you own 50% of the company, you’ll still walk away with nothing if you leave or get fired within that first year.

 

  • Post one year: you receive 25% of your stock.
  • Every month after that you get an additional 1/48th of your total stock

 

This means only at the end of four years, you’ll earn all of your stock. While this isn’t the only model to follow, it certainly demonstrates a surefire way to prevent a disastrous equity split that tarnishes your company.

 

Find a co-founder you trust, and give them equity that gets you started off on the right foot. Although it may feel like you’re giving a lot away, you’re really giving your company more by cultivating a motivated and valued first team-member.

 

 

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