How to split founder's equity?
This is a common, but extremely difficult question that all founders deal with. It is an uncomfortable question, which is why too many founders take the path of least resistance and decide to split the equity equally. As you know however, not all founders contribute equally, so an equal split isn't fair. Those working with you for "sweat equity" are taking a large risk in anticipation of receiving a higher reward later down the road. Even though I can't give you an exact formula, I can suggest some key factors to consider when deciding how to split equity.
1) Communication is key in bringing any new team member on board, and you should have a clear and concise conversation setting expectations on compensation and intellectual property. For my startup, intellectual property was a huge component, so I made sure my team members knew that all ideas generated while a part of the startup belonged to the startup, and had them sign a contract stating so. With expectations set at the beginning, each party knows what they are getting into.
2) Look at what the founders actually contribute to the startup. If a founder contributes cash or a key skill, that might warrant a greater share of the equity.
3) Look at whether a particular founder came up with the idea behind the startup. That might also warrant a greater share.
4) Evaluate whether a particular founder put in more time pre-incorporation than the other founders. If so, that founder should get a greater share.
5) Reward based on performance. It is crucial for everyone on a startup team to provide highly valuable and relevant work to the company. A team member who started at an early stage but adds little to the team may receive less equity than a member joining late, but provides a crucial skill to the company.
Ultimately, it is a decision that the co-founders have to make themselves. Several of these factors will be at play at the same time, and you should talk openly with all founders and team members so they know exactly what they are getting into. While the discussion may be uncomfortable, it is necessary in reducing confrontations in the future.
1) Communication is key in bringing any new team member on board, and you should have a clear and concise conversation setting expectations on compensation and intellectual property. For my startup, intellectual property was a huge component, so I made sure my team members knew that all ideas generated while a part of the startup belonged to the startup, and had them sign a contract stating so. With expectations set at the beginning, each party knows what they are getting into.
2) Look at what the founders actually contribute to the startup. If a founder contributes cash or a key skill, that might warrant a greater share of the equity.
3) Look at whether a particular founder came up with the idea behind the startup. That might also warrant a greater share.
4) Evaluate whether a particular founder put in more time pre-incorporation than the other founders. If so, that founder should get a greater share.
5) Reward based on performance. It is crucial for everyone on a startup team to provide highly valuable and relevant work to the company. A team member who started at an early stage but adds little to the team may receive less equity than a member joining late, but provides a crucial skill to the company.
Ultimately, it is a decision that the co-founders have to make themselves. Several of these factors will be at play at the same time, and you should talk openly with all founders and team members so they know exactly what they are getting into. While the discussion may be uncomfortable, it is necessary in reducing confrontations in the future.