A framework for Cofounder Equity Splits
Equal co-founder splits are the least political and the least controversial way to handle things at the beginning of the company. However, there are a number of questions that need to be answered before you’re sure that it’s right for you, in a very approximate order
Full-time involvement (100% weight)
- Is one person going to be less-than fully involved on a go-forward, foreseeable basis?
Capital raised / de-risking done (50% weight)
- Has one person raised capital, acquired a number of customers, validated the hypotheses, or otherwise de-risked the company meaningfully?
Past time and capital sunk in (50% weight)
- Has one cofounder been working on this for (much) longer than another? Have they put (significant) personal capital at risk already?
- For example – someone who’s been working on an idea for 6 months full time, or someone who’s invested $50K in working on the problem has probably earned a slightly greater share of the equity compared to another
Duplicative skills (50% weight)
- Is the second / third / nth person duplicative to existing skills? For example, a second product cofounder, or a second backend engineer, might not be as valuable as a designer or marketer or sales person.
Salary differences (30% weight)
- Is one person drawing significantly more salary than the other?
Experience / Other (20%+ weight)
- Is one person a topic matter expert on the company’s subject matter? Is one person significantly more senior than the other (in a way that matters)? Does someone bring networks, or relationships, or something else to the table that needs to be accounted for? The reason for this low weight is the presumption that everyone is necessary and relevant to some extent, otherwise they wouldn’t be in the conversation…
At the end of the day, there’s no right answer, but there are definitely (mostly) wrong answers. It’s best to set the ranges on what feels wrong, and work backwards from there.
If you really want a mathematical approach (I really don’t recommend it but some people might like a clean formula!), add / subtract the weights above, and use that percent to dictate what delta in equity is appropriate. For example, if someone has an edge on all the factors, the 300% edge would mean they get 300% more equity (i.e., 4x) what the other person does.
I recommended avoiding a mathematical approach because this is ultimately a human question. It doesn’t matter if this formula spits out something, if that outcome feels unfair or wrong to any member. At best, this is a list of questions and directional weightings to inform the discussion and talk through what feels fair and right to everyone. That’s really all that matters.