How to split equity amongst Co-founders
First, let’s understand what equity is.
Equity is the ownership of a company.
Each founder will get equity in the company. Each founder will get an equal percentage of the total equity. If there are three founders, each founder will get 33% of the total equity.
Now, if you are splitting 50% between three co-founders then each founder will get 16.66% of the total equity. And if you are splitting 25% between three co-founders then each founder will get 8.33%. And if you are splitting 12.5% between three co-founders then each founder will get 4.16%. (The difference is because we use fractions instead of decimals.)
What should be done when one Co-founder has a much bigger contribution than other Co-founders?
There can be many reasons for this disparity:
For example, one Co-founder may have invested a lot more money than other Co-founders and/or put in more time and effort than other Co-founders or have built most of the product by himself or herself while other Co-founders did little or nothing at all.
Or perhaps some people are smarter than others? Perhaps some people have a better personality for working with others? Perhaps some people have better social skills than others? Perhaps some people have better domain knowledge than others? Perhaps some people work harder than others?
Whatever be the reason, there could be significant differences in contribution among founders — even when all Founders contributed equally. If that’s the case then that Founder should receive a bigger share of equity — to reflect his/her bigger contribution to building the business.
This is called “Equity Compensation” and it is a completely legitimate practice which is used widely by VCs when they invest in startups (as well as by angels).
However, VCs use this system because they want to protect their investment and hence require legal contracts from Founders regarding vesting schedules etc., which Founders do not usually agree to give for bootstrapped startups.
So this Equity Compensation can only be used when Founders agree to give it voluntarily — not because it’s fair but because they want to reward someone who worked harder or put in more money or whatever!
And if you do not agree with such Equity Compensation then make sure that your co-founder who deserves such compensation agrees with it before he/she becomes your co-founder.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.