Co-founder equity split

Finding an equity split that all co-founders are comfortable with is complicated. Learn some of the key ways to split equity and gain insights into the best path for you.

Striving for a fair split

How equity in a business is divided codifies the relationship between co-founders in a financial agreement and sets the tone for future collaboration. To maintain a healthy relationship, the process should be driven by what’s fair – which is easier said than done.

Being fair is not the same as being equal. If one co-founder is putting more into the business and achieving better results, is it fair they receive the same amount of equity as a co-founder contributing less?

Over time co-founders may also grow unhappy with the original split.

To combat and resolve these issues and avoid disharmony later down the line, careful consideration, clear-cut communication and extensive discussion are essential. It’s better to air potential concerns than let them simmer and re-emerge in future business operations.

Timing the equity split just right

The timing of your decision will affect who gets what. The longer you wait, the more information you have at your disposal to determine a fair split. On the other hand, there’s also more chance of disagreements later on. Research shows that the longer co-founders deliberate on the right equity split, the more likely it is to be uneven – which is not necessarily a bad thing.

When it comes down to it, there is no right or wrong time to make the decision and it will vary from startup to startup. Some founders split evenly at the beginning to avoid the possibility of extensive negotiations and conflict. But if you wait, you’ll get to know the dynamic between founders and be able to bring a more comprehensive understanding of the role each founder plays to the decision.

How to split startup equity between co-founders

There are a few different routes you can go down to split equity among co-founders. Before entering into any final decisions seek the help of a legal or financial advisor.

Flat split

Each co-founder gets an equal share of the company. This method is the simplest as it doesn't require any valuation or calculation.

Value-based split

Founders are assigned equity based on the value of their contributions to the company. This could include how much funding they bring to the table, how much time they dedicate to the business, the value of their professional contacts and previous experience.

Supply and demand split

A supply and demand split is based on the idea that the market rate for each specific role should determine how much each co-founder receives. For instance, the market rate for a CEO is higher than that of a CFO and the equity split should reflect this.

It’s not just about the split

In an ideal world, a co-founder equity split is simple. The reality is thorny with differing opinions and factors to take into consideration.

How do you cater to a co-founder that would rather take a higher basic salary than a substantial chunk of equity? While there are good reasons for demanding a higher base salary (an individual’s financial situation, for example), holding equity demonstrates a certain commitment to the business which a high base salary cannot.

On the other side of the spectrum, the rise of secondary transactions facilitates exits for co-founders, employees and angel investors making startups more agile and more able to respond to changing circumstances.

The importance of vesting

In the startup ecosystem, a vesting schedule for employee equity is common practice as it encourages long-term commitment.

At a founder level, despite being a sensitive topic, vesting schedules are necessary – especially when dealing with multiple co-founders. When approaching investors for capital, this is something they will have an eye out for.

Put simply, founder vesting incentivizes co-founders to stay and protects the company in case any of them leave.

Setting the tone for future decisions

An equity split also influences important, company-defining decisions going forwards. An even split means there’s no deciding vote should it be impossible to reach a consensus. Some co-founders prefer the idea that, no matter how tricky the matter is to solve, a consensus has to be reached for a decision to be made. What’s most important is that you all walk away feeling your voice has been heard and a reasonable decision has been reached.

To learn more about managing your cap table or using equity, check out Carta Classroom or speak to a member of our team today about our equity management solutions.