You may still have doubts whether an unequal equity split between founders is worth all that fuss. Calculating founders’ input into the startup, having conversations about involvement, commitment and future expectations, making promises to each other and feeling anxious about not being able to live up to them. Wouldn’t it be easier for founders to split equity equally and get right to work, feeling mutual trust and respect?
In order to resolve this issue we decided to bring to your attention the most influential posts on dividing equity between startup founders that are out there on the web. If you are like most tech startup founders we know, you should believe in numbers. So, we decided to count voices in support of unequal equity splitting and voices in support of equal equity splitting. The results turn out to be quite convincing.
1. A very old post by Dharmesh Shah on OnStartups.com – a blog for entrepreneurs with more than 23,000 subscribers. In spite of the date of its creation, the post hasn’t lost its relevance. It talks about different factors which lead to unequal splitting. And its definitive answer to the question “Should we divide equity in our startup equally” – is “no”.
1:0 for unequal splitting of equity
2. The most well-known advocate for equal splitting of equity is Joel Spolsky. He wrote a widely-cited post on “totally fair splitting of 1:0 for unequal splitting of equity ownership in a startup” which features an interesting method of splitting equity not just between founders, but between the whole team including employees. Joel’s website where this post was originally posted got closed, but luckily there are plenty of reposts on the web.
3. In reply to Joel Splosky’s post on fair equity splitting in a startup Dan Shapiro writes quite an expressive piece on this topic with the headline: “The only wrong answer is 50/50”. In his post Dan gives examples of what should be counted in when dividing founders equity – things like coming up with the idea, creating an early product, being a CEO, full-time commitment and cash contributions. He also gives his estimations of how valuable are these factors relative to one another.
2:1 for unequal splitting of equity
4. A great post on this topic by Mark Suster (I love his posts for always being so much to the point). Among other important things Mark talks about something nobody else mentions: that 50/50 splits between founders are in fact unstable. They create no true leader. They create a feeling of shared responsibility, which is not a good thing for startups in which one founder is always more involved and committed than the others.
3:1 for unequal splitting of equity
5. Not just entrepreneurs and VCs discuss the topic of equity splitting in startups – business professors do too. A huge supporter of unequal equity splitting is Noam Wasserman, a professor at Harvard business school, whose brilliant case study of equity splitting in two startups we discussed earlier in this post.
4:1 for unequal splitting of equity
The results are quite convincing: 4:1 for splitting equity unequally between founders even in spite of hard negotiations and calculations (which can be made a lot easier if you use a formula or a model like the one we created at Founder Solutions). This is not to say though that 50/50 split is always a wrong decision. In very rare cases, as one can imagine, even the most sophisticated formula might point to this result, and then you should proudly go for it. But even then a question will remain: if your team has founders who are so much alike, wouldn’t some diversity of experience and expertise add more value to your startup?