For any group of founders, splitting equity can be a hairy task. There’s just too much to consider, such as the amount of work done, when a person joined, who came up with the idea…and the list could go on and on.
The reasoning for so much convolution boils down to two things: First, it’s ownership over something that’s turned from just an idea into a living, breathing thing. And two, the amount of work that’s required over creating it is never viewed equally by those who created it.
Think of this as a couple that has to decide who keeps a dog after a breakup, arguing over who taught it to sit versus who taught it to rollover. Both of those things make the dog who it is, but it’s hard to gauge which contribution mattered more.
Despite the hardships over who gets what, it’s actually much easier to gauge equity than you might think. All you have to do is analyze where the jumping off point was, and how the product has compiled from there.
Learn Your Value
While you might believe that your idea is worth a million bucks, it’s nothing without the resources, product, or people behind it. Quite simply, ideas are worthless until there’s a backing on how they can come to life. And when it comes to putting a price tag on an idea, development, or even deployment, you should never split things equally.
The reason why an even split is a bad idea is that you haven’t quite figured out the scale of work yet, as well as knowing how long someone is going to be invested in the project later on. Additionally, (as the article notes) investors tend to look unfavorably upon this as it says every cofounder is going to do equal work throughout, which isn’t a quantifiable thing. However, while the intentions of an even split are justifiable, figuring it out as you go along could be even more costly.
One of the biggest mistakes a founder can make is hopping right in and saying “let’s figure out the equity later.” Off the bat, it spells a recipe for disaster. Not only are there going to be disputes later on, but it also says that a founder doesn’t realize the full scale of work ahead of them. This is will eventually lead to a lack of confidence in leadership, as well as a feeling of an undervalued team.
As Y-Combinator brilliantly points out, splitting equity equally requires looking at things in terms of a value system. As the tech world respects executions (not just ideas), the value of contributions can essentially boil down to “who executed the most and were those executions crucial to our success?”. More, Y-Com also notes how it takes a long time to truly build value in the equity of a company, which is a great motivator towards success. Finally, the article alludes to something that should be true regardless of when an employee came on – always value your team.
How to Divide Value
To start, look at how much work has been done, as well as who has helped. While you can use calculators like these, be mindful that this is only a starting point. These tools don’t necessarily equate skill level, success rate, or overall value of time spent, but they can be a good way to reach your ballpark. Additionally, remember to consider current and future developments in every avenue that could potentially have a heavy impact on growth in the near future. For example, if you have a brilliant CTO that’s been slaving away at building out your prototype while your CMO has been building up a solid pipeline that’s waiting to sign upon release, then both should be weighted equally. And while it’s imperative to think about your co-founders, you should also consider how equity will play out with other factors as well.
As you’re raising funds, VC’s and Angels are going to become more involved, examining how much their shares are worth in comparison to how much you’re raising/what your current team has. Beyond that, there’s also lawyers that are going to help divide equity, which is going to affect how much value you put into investment. Even with all this in mind, your overall best bet comes down to one thing: factoring how much value you put into work versus how much you put into investors, and how the two can work together harmoniously.
