Splitting equity amongst founders is often a sensitive subject to speak of and therefore goes undiscussed in detail. However, assuming your company has more than one founder, the initial equity split is a must-have discussion for a couple of reasons.
- Equity splits serve as a screening test. Many founders would prefer a brief conversation, a handshake and then move on without really achieving anything. Rather, having an in-depth conversation allows co-founders to really understand the position, purpose and values of one another. The discussion itself serves as an early test revealing how cohesive or fragmented the team chemistry may be.
- Investors perform their own due diligence on how companies are structured; i.e., percentage of the company each founder owns. During a fundraising campaign, the inevitable question of “why this type of split” will arise and having a well-thought out answer is a vital step in gaining an investor’s trust. A wishy-washy answer gives the impression of a lack of internal communication, or worse, a lack of basic business acumen.
So how do founders go about deciding how to split equity? Michael Seibel, CEO and Partner of Y Combinator, recommends an equal split among co-founders and goes as far to say “If you aren’t willing to give your partner an equal share, then perhaps you are choosing the wrong partner.” On the other hand, Gary Schall, Partner of the law firm WilmerHale and contributing writer at TechCrunch, recommends splitting equity based on what each founder has contributed and can contribute by applying values to each type of contribution.
The decision to have an equal or varied split should revolve around a thorough and in-depth conversation among the founders. There have been plenty of successful startups on both sides of the decision and finding the right choice for your company will be key to successful fundraising and onboarding of new employees. Thus, by proactively addressing the company’s ownership structure, founders will already be tackling some of the unknowns and positioning themselves for potential success.