I was asked a question last week about co-founders compensation, specifically around guidance around splitting equity and salary requirements for the early contributors for a new start-up. The person was asking for the benchmark data for percentages to validate the right thing to do between two co-founders and one early employee that had more demanding salary needs. Let me start by saying I think the only wrong answer in the how to split equity is 50/50.
All that 50/50 decision shows about you is that in the first significant company decision you’ve faced as co-founders you have bailed out and taken what looks to be the easy path. Except that both you and your co-founder have entered into an agreement that most first time entrepreneurs have no idea about. Now, let me clear here, there are exceptions to this advice where 50/50 worked… but those exceptions are similar to having a “Billion dollar pre-revenue company” to use a start up exception.
At the front end of the process here are some things you need to consider:
- Who’s idea is it?
- Who’s putting in the start-up cash?
- Who has the passion for the idea?
- Do you have the same work ethic?
- Will you work for the same salary?
- Will you have the same duties?
- Will both of you sign personal guarantees?
Doing a start-up is hard. It’s easy to gloss over these things when all you see is upside. But hard when your getting asked to sign a personal guarantee. Make sure you talk through the above items before you decide how to split equity.
Now, you’ve got through round one. It’s time to work through round two of the dialog. Compensation and outcomes.
- Do you have the same compensation needs/expectations? e.g. can one of you work for free, but the other one needs to be paid. Does one person have a family and is used to making $180K a year while the other can work for $90K.
- Exit outcomes – One person may define success as a Billion dollars while the other would be happy to pay off their house and pay for kids college.This will influence your risk tolerance (all in vs. taking cash off the table).
All of these things impact how equity is split and how you get paid in cash. Let’s be clear both of you have expectations for compensation. And each of you have higher expectations then you have voiced to your co-founder. Voice those expectations now vs. later… it will never get easier. Complete these items by writing them down separately and then walk though them over a beer with your co-founder. After you’ve had a couple of days to process the information, then decide how you should split the stock…