The Facebook effect

Do you know how Mark Zuckerberg split equity with his co-founders in the early days of Facebook? Bear with me and read this post to the end, as this story teaches the importance of dividing equity fairly – which almost never means equally.

Zuckerberg was from the very beginning a true leader of the project destined to become Facebook. He was the “idea guy”. He gathered the team around himself and inspired them. He wasn’t focused on money, but “content to make something cool”. His idea and execution attracted great mentors and investors.

Zuckerberg’s early team included Eduardo Severin, who knew business stuff and who gave Mark Zuckerberg $15,000 to pay for the servers needed to run Facebook site, and Dustin Moskovitz, Facebook’s first CTO.

At the beginning Facebook shares were split between them, with Zuckerberg owning 65%, Severin owning 30% and Moskovitz owning 5%.

If you watched the “The Social Network” movie, you should be familiar with the rest of the story. Severin made some false steps failing to perform his duties at the company and even trying to promote his side-startup at the expense of Facebook. Luckily, his share was smaller and Mark Zuckerberg had enough control to do things his way and fix the problem.

What would happen if their team had divided shares equally at the start, with each of them owning 33,3%? Zuckerberg then wouldn’t own the majority of shares and wouldn’t be able to force Severin out of the company. And Facebook would probably never become the successful giant we know today.

Now, think again in the light of this story – will equal split be good for your startup?

This story is based on a much longer, but insightful article from BusinessInsider.com

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Five things you should know about founder equity (before you split it)

Founder equity (same as founder shares) is how much of the company (or soon-to-be company) belongs to its founders. We listed five most basic – and most useful – facts about founder equity to help you look at it in a new light before you split it with your co-founders.

1. It is an unlimited resource

Founder equity is not a limited resource. It’s an unlimited resource. It’s growing along with your company. Don’t be afraid to share equity with your co-founders, employees, advisers, investors. If you start working on an idea and own 100% of it – that’s 100% of nothing. It has no value yet. Value is created by people you’ll be able to attract and inspire by your idea. If at the end you have 10% of equity, that may be 10% of a billion dollar company. Isn’t it better than 100% of nothing?

2. Treat it as remuneration

At the very early stages of startup lifecycle founders are typically not paid salaries. Equity is then used as remuneration to the founders for the work they do. Similarly to remuneration, shares of equity should be aligned to founders’ performance, their contribution to the project, even the actual time spent working on the startup.

3. No payouts, at least in the short-term

In contrast to remuneration, however, equity is not “paid out”. It is a promise for founders that they will get the right on future company profits, if there are any. While the company is being built and has no real value, the founding team may want to regularly review their fair division of equity to make sure each founder gets a share corresponding to what he or she did relative to other startup co-founders.

4. Fix it when there is funding

The best time to get your division of founder equity fixed is when your startup is ready to raise funds or incorporate the company and use a real shareholder agreement. At that stage founders, if they take on executive roles in the company, usually start receiving salaries. From that moment on equity is a measure of how much control they have over the company and what is their share in the company profits.

5. Vesting is good for it

Founder equity may be subject to vesting. Vesting means that although founders already have certain shares of equity assigned to them, they still need to “earn” them by staying with the company long enough (standard vesting schedule spans over 3 to 4 years). Vesting prevents founders who lose interest in the project and leave from walking away with half of the company – which is good for those who stay and continue working hard to get things done!