Dan Shapiro (Randy Stewart photo)

Guest Commentary: The question of equity brings out the most fundamental differences, perceptions, and values in an aspiring startup.  In fact the equity question, more than any other, may strangle a young company before it can even get started.  And that’s a damn good thing.

But before we get in to that…

Who’s a founder?

As straightforward as this question sounds, it’s a tricky matter. The founder moniker is black and white, but the situations are all shades of gray. Setting aside the philosophical question and focusing on the more useful economic one, though, there is a simple approach: founders are people who take a very particular kind of risk.

There are, quite roughly, three stages in every company’s life:

1.  Founding.  The only money the company has is what you put in.  You are getting no money out of the company.  The company will probably fail, and you will lose all the money you put in, plus the lost salary, plus you have to find a new job.

2.  Startup.  The company has money, either from investors or from revenue, and they give you some of that money every month.  Your salary is less than what you’d get at a big company.  50/50 the company fails and you have to find a new job, plus you’ve lost the difference between your startup salary and the BigCo salary.

3. Real company.  You get “market” salary.  It’s unlikely the company fails, and if it does, your downside is limited to unemployment.

Facial hair alone is insufficient to determine founder status

The rule is this: if you’re working for a company that’s so young it can’t pay you, you’re a founder.  If you are drawing a salary on your first day at work, you’re not.

What’s a founder worth?

A founder is defined by the inability of their company to pay them (or anyone else) for anything.  A founder’s primary job, then, is to get their company some money – either by raising investment or by generating revenue.  So a founder is valued by two things:

1) Their contribution

2) The market

The first of these is fair.  The second is  economics.  Both are essential.

And now, the formula

Of course, there can be no right answer – but this one’s not so terribly wrong.  To start out with, give every founder 100 shares. Some startups are born running, with all founders on board from the beginning.

But others come from one leader who recruits the others.  You may or may not take the CEO title, but if you’re the one who rounded up the co-founders and talked everyone in to getting things done, add 5 percent to your holdings.  If you were previously 100/100/100, you’re now 105/100/100.

Ideas are precious, but dwarfed by execution (5%)

It’s a lie to say that ideas are worthless and execution is everything… but it’s not too far from the truth, either.  If you’re the founder who brought the original concept to the table, increase your share holdings by 5 percent (so if you had 105 before, you now have 110.25) Note that if the idea is implemented, or patented, or otherwise has some execution behind it, then…

The first step is the hardest (5%-25%)

Creating a difficult-to-replicate beachhead can give a fledgling company direction and credibility.  It can help with revenue and with financing.  If you bring a concrete start to the table – a critical, filed patent (not a provisional), a compelling demo, an early version of the product that isn’t quite there yet, or something else that means much of the work towards financing or revenue is already done – you get a boost of 5 percent to 25 percent.  The key variation here is, “How much closer does this get us to revenue or financing?”

CEO gets more (5%)

Here’s a common situation: the split is 50/50 so that neither party controls the company.

Well, if you don’t trust your CEO with the majority of shares, you’re founding the company with the wrong person.  Market rate for a great CEO is higher than market rate for a great CTO, so the CEO job gets a bit more equity.  This isn’t fair – the work isn’t easier or anything – but it does reflect some market realities.

Fulltime commitment is expensive (200%)

Are you the pig? (Aaron Harmon photo)

If you’re working fulltime while your co-founders are working part time, you’re the pig. You’re working more, and you’re risking a lot more if the project fails.

Furthermore, part-time cofounders are a big minus to someone considering an investment.   Their equivocating will be expensive.  Add 200 percent to the shareholdings of all the fulltimers.

Reputation is the most precious asset of all

If your goal is to get investment, some people make that much easier.  If you’re a first-time entrepreneur partnering with someone who’s successfully raised VC dollars, that person is a lot more investable than you are.

In the extreme, some entrepreneurs are so “investable” that their involvement is a guarantee of raising funds.  (It’s easy to identify them: Ask the investors who know them best “would you back them no matter what they do?”  If the answer is “yes”, then they are that kind of super.)

These super-preneurs essentially remove all the risk of the “founding” stage, so you should expect that they get the lion’s share of the equity from this stage.

This point doesn’t apply to most founding teams, but when it does, expect the super-preneur to take 50 percent to 500 percent or more, depending on just how much more significant their reputation is than their cofounders.

Treat cash like an investment

Ideally, each investor contributes an equal amount to the company.  That, plus their labor, earns them their “founder shares.”

It’s possible, though, that one founder may put in significantly more.  The price for that is high, since it’s the earliest, riskiest investment.  That founder will get more equity; to determine how much, talk to a good startup attorney about a reasonable value for your company and work from there.

For example, they might say that your company could reasonably be valued at $450,000 for investment purposes, so a $50,000 investment would merit an additional 10 percent.

There are more structured ways to do this, ranging from revolving credit lines with interest and warrants to convertible debt that converts in to common shares.  But these all mean increased legal bills and, more importantly, complex cap tables – something that can scare off outside investment.

The final accounting

At this point,  you’ll have something like 200/150/250.  Just add up the shares (600, in this example) and divide each person’s holdings by that number to get their ownership: 33 percent, 25 percent, 42 percent.

If you have equal shares, you did it wrong

A couple of years ago I was asked to give a talk at a continuing education series for attorneys.  I asked to see the class list, and opposing counsel for a deal I was working on was there, so I figured it was probably a good idea to do it. I asked them what to talk about, and they helpfully replied “startups.” I pressed for more detail: “You mean like generic startup experiences?  Legal issues startups face? Advice for attorneys?”

“Yes, exactly like that!” came the enthusiastic reply.

Clear direction in hand, I started musing on the early days of Ontela.  Our company started as just two of us, Charles Zapata and I, brainstorming in a basement.

We covered a ton of ground – generating a million ideas an hour, each better than the last, on everything from business concepts to core values to better ways to file expense accounts.  No matter what came up, we either agreed, or quickly resolved our differences.

Life was good.  We split the equity 50/50.

It wasn’t until six months later, when we’d quit our jobs and committed our savings, that we nearly destroyed the company with our first real argument.

The advice I gave the lawyers was this: “The most common cause of startup death is founders who can’t resolve their differences.  Nobody hears about it; they just pack up and go home before the company ever had a chance.

If there’s one thing you can do to help your clients – really help them – it’s to get the hard questions on the table early and help them work through them together.”

Entrepreneur-turned-venture capitalist Mark Suster talks a bit about this in this four minute video clip about “the co-founder mythology.”

50/50 isn’t a business decision, it’s a compromise

You need to get used to hard questions.  You need to get used to trusting each other.  You need to get used to the idea that you’re not all equal.  You need to have the difficult discussions about responsibilities, contributions, roles, and compensation.  You need to do  it before you make commitments to investors and employees.

And if you find that the only way you can get a decision made is by compromising – then you need to stop now, before the price of failure climbs higher.

There’s no way around it. You’re going to have to split the baby, but it doesn’t require the wisdom of Solomon to get it right.

Take your time, keep a level head, and remember: this is just the first of the decisions you’ll be making together for the rest of your company’s life!

PS: Joel, you’re awesome, but I couldn’t disagree more

Joel Spolsky is one of my favorite authors.  He wrote a thoughtful piece about the same subject that reaches very different conclusions.  Here’s why his article is wrong:

  • It confuses “easy” with “fair”.  If you’ve had two successful exits already while I’m doing my first startup, it’s easy but not fair to split it 50/50.  It’s fair but not easy to reach a more accurate split.
  • It advocates avoiding conflict so you don’t “argue yourselves to death.”  That’s exactly the wrong approach: if you’re going to argue yourselves to death, do it now when you don’t have investors and, worse, employees (“Mom and dad are fighting again.”)
  • It gives too much equity to employees who are drawing salary, at the expense of the founders.  The majority of founders work without salary for companies that ultimately fail.  Employees are at least guaranteed a salary.  The difference in risk is monumental. Nivi provides a lot more detail here explaining why founders should get a lot more stock than employees.
  • It doesn’t reflect market realities.  A typical Series A allocates 20 percent for the employees.  Joel’s model has 33 percent for the employees, which means just 33 percent for the founding team.
  • IOUs are nearly worthless.  Most companies don’t succeed in raising money or getting profitable.  Of those that do, many investors will require that IOUs be waived as a precondition of investment.  A $1 IOU has an expected value of nickels.  The right solutions are either convertible debt (for investment) or equity adjustments (for anything else).
  • It’s worth noting that, by the way, Joel is spot on that founder vesting is required in any cofounder situation.

Joel’s already successful.  I believe this is his first startup with cofounders and investors.  This looks like a great, idealistic set of ideas — but it’s economically unsound, and doesn’t reflect the majority of the market out there.

Note: I’ve only founded two VC-backed companies myself, so I’ve vetted this analysis with a bunch of folks to access a broader experience base and make sure I’m not out in the blackberry brambles here.  That said, a few VCs (including Fred Wilson, one of Joel’s investors) have chimed in to endorse Joel’s analysis, so perhaps he’s not so crazy either.

Thanks to Bill Bromfield, David Aronchick, Galen Ward, Joe Heitzeberg, Rand Fishkin, Sarah Novotny, and Tony Wright for providing feedback on drafts of this.  Mistakes, overly broad assertions, and incendiary observations are mine, not theirs.

Dan Shapiro is CEO of Sparkbuy. You can follow him on Twitter @danshapiro or check out his blog here.

(Home page image of cake via Rex Roof)

EDITOR’S NOTE: Shapiro’s post is sparking a great discussion here on GeekWire, and on Hacker News. Thanks to everyone for weighing in.

Comments

  • http://www.nosnivelling.com daveschappell

    I love this post. I don’t agree with it, but I Rules-of-Thumb are usually a good way to at least frame the problem. There are going to be times where 50/50 is right, when a trust/respect level is at the right spot, but that usually/never is going to be with a brand new startup, with people who haven’t worked together.

    • Anonymous

      I also fall in the disagree camp here: 50/50 works well for equally matched founders. It can be a red flag if one person is obsessed with control and, like Tony mentioned, the difference between 45% and 50% can be huge as a co-founder.

      If one person is taking a salary and the other is not or one person is not working full time from the start, it’s a different story.

    • http://twitter.com/danshapiro Dan Shapiro

      It’s very true this is only rules of thumb. My first version of the article was filled with so many caveats and exceptions that it was unreadable. So I decided to rip them all out and count on the fact that nobody thinks I’m smart enough to be right all the time.

  • http://theprogrammersparadox.blogspot.com Paul W. Homer

    For long term success, I think companies have to pay close attention to both the tactical and strategic issues. For a technical company (like software), the tactical issues are sales and marketing, while the strategic issues are research and development. The business founders know, and focus heavily on the short-term issues. The technical founders (hopefully) focus on the longer term (above and beyond product vision). If the balance is off, the company may rush out of the gate only to stumble very badly. Most of these weighting systems I’ve seen are bias toward business founders, which consequently overvalue the short-term at the expense of the long-term. Yes, you do get business people like Steve Jobs, that also have great strategic insight, but they are a minority in the business world. At least with 50/50 you have some chance of achieving balance. With 65/35 you’re likely just delaying the inevitable.

  • http://plc.vc Peter Clark

    Hugely disagree.

    You’re a founding team, this is the rock solid base you’ll require till your Initial Public Offering and beyond. Everyone needs the same thing to risk, and the same reward. The great thing about startups is you can judge employees and founders on their potential rather than their past (eg: worked at Google and have $100k in bank vs other founder who is college drop out), and obviously you only work with the highest calibre people … so why isn’t it equal?

    Additionally, having say, 49-51 split “for when arguments arise” is a terrible reason: if you can’t debate your company to a decision between the founding team, or do not have the trust to lean on one of your founders, that is a problem.

    Having an unequal split means debates are won simply by saying “well I have the majority…”

    • http://twitter.com/danshapiro Dan Shapiro

      I’m a strong believer in “dating up” – finding a cofounder who’s way, way better than I am, and who I have little right to expect to work with me. I take the same approach to hiring (and marriage, as you’ll learn if you ever meet my awesome wife :) ). But if you’re going to expect someone who has a world-class reputation to work with you, it’s appropriate to make the equity split reflect that.

      • George Clooney

        Doesn’t dating up lead to jealousy though? Wouldn’t you be afraid of letting me meet your awesome wife because she might run away with me?

  • http://www.duncanhaley.com John Haley

    Dan, great post. These ideas are applicable to all kinds of businesses, mine included. I am starting to bring some employees into an ownership position and some of the conversations are anything but comfortable. Its easy to try and shy away from that, but when we sense a topic is uncomfortable, we plug our noses and dive in (in a respectful and “seek to understand” way). The results are always positive. Good job and great points.

  • http://twitter.com/webwright Tony Wright

    I’m in the “thought provoking post, but disagree!” camp on this one.

    As a guy who has been the CEO for most my startups, I’d NEVER say that I deserve more equity because of that.

    Also, 5% for the IDEA? Jeebus. Is THAT idea the source of your eventual triumph? Or is it the 100 ideas that come later? If you pivot from your idea 6 months down the road in a direction your co-founder suggests, does he get a portion of that 5%? Or perhaps more, because it’s your (now shown to be bad) idea that’s wasted 6 months?

    I DO agree that you need rules for who wins when a disagreement can’t be resolved– you can have those rules without handing over equity. You should also have rules for dissolution.

    Co-founders are a market like any other. With these rules, and with Dan’s outstanding reputation, I have no doubt that he could land a co-founder. But it’d always be a lesser co-founder than he COULD get. Minority shareholders are also more likely to bolt/get grumpy when things get rough.

    In short, Dan’s trying to maximize his personal wealth in the (exceedingly rare) event that the startup wins (sees liquidity) rather than maximizing for the company’s chance of success.

    • http://twitter.com/scottru Scott Ruthfield

      I actually think the 5% idea is clever, because while for Tony (and other serial startup entrepreneurs) it sounds too high, for most first-time entrepreneurs it can act as an anchor.

      I can’t tell you how many first-time CEO’s I’ve talked with in the past few years, mostly helping them think about how to form their startup team (co-founders and employees) and how to break up their equity – and _every single one_ has thought the idea carried a 100%+ premium (i.e. 40% for them, 20% for co-founder kind of thing).

      So for the newbies where a 0% premium is too difficult a bridge to jump off, a 5% starts a different conversation.

      • http://www.facebook.com/ben.levy.528 Ben Levy

        Hi Scott,

        This is in response to a 2 year old post, can you see my message?
        Ben

    • http://twitter.com/danshapiro Dan Shapiro

      You’re assuming that I think I’m the one with the hot stuff reputation and trying to maximize my “personal wealth”. But you’ve got it backwards. The reputation point came from trying and failing to reach agreement with two different technical cofounders because *they* wanted more equity based on their reputation/connections.

      I was the ugly duckling, and in retrospect, they were right. I should have realized this and weighted the equity equation towards them because of their reputation and proven capabilities as compared to my own. It’s only in hindsight that I can recognize the premium that their reputation and connections brought to the table.

      I should have qualified the idea point: it assumes that all cofounders are deeply in love with the idea and mutually believe that it’s truly innovative, unique and differentiated, versus “Let’s do a daily deals site.”

      To answer your question about what happens if the company pivots: the initial split is always wrong as more information becomes available (turns out Bob is working harder, or Jane takes the CEO title), but is almost never changed. So no.

  • Anonymous

    I agree with some of the comments as well, and I favour an equal split. I think it’s just too arbitrary to say “I do 5% more work” or “I’m 5% more important”. If it’s the right group of people then everyone is working hard and trying to make it happen, even if not all of them have the CEO title. Plus, having a non-majority stake is a massive disadvantage in terms of a future buy-out scenario and from a legal perspective.

    There are other ways to solve disagreements other than someone saying “I have the majority so…”

  • http://www.puzzazz.com Roy Leban

    Great post, Dan!

    Every year, we hear people wanting to fix the tax system to make it simpler and fairer. What they don’t realize is that making it simpler won’t make it fairer. The goals are largely antithetical. The same is true here. While I don’t agree that 50/50 is never right (it worked out for me once), I think it is never correct that you should just go with it. Figuring out the right equity split takes work. Figuring out how much equity goes to additional founders who join in late takes work. It’s important to do this work early so you don’t end up with an explosion later.

    I also pretty much disagree with Joel Spolsky. His ideas on salary are the most off, but he’s got a pretty skewed perspective.

    I think people who disagree with you are taking your post too literally. Here’s how I read it: “do the work to figure it out!”. Amen.

  • http://faves.com/users/mike mckoss

    There is no mention of vesting shares here. I think it’s essential to have a plan either for retrieving shares from a founder if they reduce their involvement with the company in the future, or for diluting their interest by vesting shares to the active founders.

    I think the “right” way to deal with equity is to value “contributions” as they are made. At formation, merely “joining” does not represent a contribution unless you are also contributing, money or valuable IP (or “reputation” as Dan suggests). If you work without pay, you are making a contribution that should be recognized each month.

    I’m not a lawyer or an accountant, but I think for tax purposes you may not want to actually receive shares each month, but rather have the right of the company to retrieve some shares in the event you do not contribute according to plan.

    • http://twitter.com/danshapiro Dan Shapiro

      It’s down near the bottom of the article, in bold. :)

      • http://faves.com/users/mike mckoss

        I missed it since you buried it in your critique of Joel’s recommendations, not placed more prominently in your own guidelines.

        • http://twitter.com/danshapiro Dan Shapiro

          Yeah – it was a bit off topic so I didn’t feel like it belonged in the main section, but important enough that I had to put it somewhere.

    • http://www.puzzazz.com Roy Leban

      When stock is owned by founders, the right for the company to buy back unvested shares happens through a “repurchase agreement”. Important note: When you have a repurchase agreement, it is essential to file an 83(b) election to avoid adverse tax consequences.

  • http://twitter.com/chrisamccoy Chris McCoy

    Warning: this is a rant

    Building scalable web products should look a lot more like building real-world sky scrapers and multi-unit condos in real-life. Until it is, this 50/50 split stuff limits true, world-changing entrepreneurship on a mass scale. (Side note: “Apps” is not world-changing entrepreneurship unless you have some kick ass patents to scale into full blown web services.)

    The real estate developer or the product owner who can secure the financing should own 100% founding shares. Then, just like building that skyscraper, fill out the team to bring the product vision / building to life. Team should be compensated with initial cash that went in. When this world exists, more game-changing companies will be built. Until then, engineers/hackers/coders win and “product owners” or the actual real estate developer have to give away 50% of their equity in addition to the initial dilution just to get the product vision off the ground. This is fundamentally different to how real-life real estate is developed and incentivized.

    As a result, our smartest (potential product owners) aren’t building startups out of college but rather joining consulting and i-bank firms at $100k+/year. Giving away 50% from the outset doesn’t compete with $100k guaranteed, even if it means throwing away a few years of your life. In summary, we need smart people building things, but building things requires taking a 50%+ haircut to even get in the game.

    The way we develop scalable web products should be so much more predictable and verifiable than they are today. The product is the design, user-experience, business logic, and the code–not just the code. Because code rules, and the process/education of managing the product creation process is so mystical, the best stuff is yet to be built by the most capable people.

    Today, engineers rule the world. In reality, really good product people (owners) should. That world exists when the product creation process is essentially standardized and de-risked so the “idea guy”–the quarterback of the design, user-experience, business logic, code, and deployment process–can go from product vision, design, data/code, and deployment as “lean/agile” and quick as possible. And investors can bet on that de-risked process.

    That’s what entrepreneurship needs. Not 50/50 arguments. These prevent the best stuff from being built.

    • http://twitter.com/danshapiro Dan Shapiro

      Disagree with this in almost all cases, for two reasons. First, because in technology startups, it’s usually the case that at least as much value derives from the engineering work as from the business work. Second, because anyone who goes without pay to develop an idea that is likely to fail (based on industry averages) deserves the founder-class rewards that result.

      • http://www.puzzazz.com Roy Leban

        The idea that business people are the only important people and the technology people are a commodity is why there are so many bad apps, sites, and services.

        The idea that tech people are the only important people is equally wrong.

        Make either assumption and the % you’ve cut is the likelihood that you’ll succeed.

        • http://twitter.com/chrisamccoy Chris McCoy

          Calling business people “business people” is somewhat derogatory. It’s like calling developers “code monkeys” or commodities. To think that way, is to lose even before it begins.

          • http://www.puzzazz.com Roy Leban

            Wow! I don’t think calling people who do business activities “business people” is any more derogatory than calling people who create and implement technology “tech people”. I’m surprised you could find offense in a comment saying that both these groups are equally important. Do you have a chip on your shoulder?

            If you’ve got better terms, I’m happy to listen.

          • http://twitter.com/chrisamccoy Chris McCoy

            I think it’s general knowledge in the tech community “business people” or “MBA-types” are frowned upon. Slide decks, vaporware, etc. from the bubble kind of created this, I think. Here’s a good follow-up read: http://www.quora.com/Are-top-MBAs-in-fact-looked-down-upon-in-Silicon-Valley-If-so-why

            Goal of a “business” person should be to become a really good product person. So someone that holistically understands the backend development process, can grope architecture, but really owns the design, user-experience, and business logic. So they’re never blind to the process, can account/estimate/predict a product build. So business and product can be integrated.

            As for myself, I started as a frontend “idea guy” but have progressed into learning feature development on my own so I can manage it.

            Speaking from experience here (on all posts).

            No I do not have a chip on my shoulder (I don’t think so, anyway. Well I hope not).

          • http://www.puzzazz.com Roy Leban

            I’ve been in this industry for a very long time and I have never heard anybody say those terms were derogatory. If you can offer another descriptive phrase, I’d be happy to use it instead.

            In any event, the phrases “business people” and “MBA types” are not in the article you link to. The article is about a different topic: are such people respected?

            Yes, there are some people who don’t like business people or who don’t respect them. Hey, that’s life. Deal with it. I value people with skills that I don’t have. That’s true of all the best entrepreneurs. But, I absolutely don’t value people who have gotten a degree in X (where X is *anything*) and suddenly think they’re the world’s expert on X. This is true of business people, developers, etc., and particularly new college hires at big companies. The degree, whether it’s an MBA or otherwise, is not a substitute for experience, skills, intelligence, and hard work.

            Here’s how you’re coming across to me. You think of developers as commodities, something akin to “code monkeys” and you’re careful to not convey that. But I actually respect good business people and you’re offended because I would use that term, while not offering a better term. If that’s not how you intend to come across (and I suspect it is not), you might want to take another look at what you’ve written.

          • http://twitter.com/chrisamccoy Chris McCoy

            Definitely not my intention but my thoughts run counter to yours. I think the process can be decoupled, therefore product design and product engineering are equally important.

          • http://www.puzzazz.com Roy Leban

            equally important != can be decoupled

            You have a logical fallacy. You are saying (A and B can be decoupled) => (A and B are equally important). Even if the supposition was correct, it would not imply the conclusion. This is a non sequitur argument.

            The truth is that they cannot be decoupled AND they are (roughly) equally important.

          • http://twitter.com/chrisamccoy Chris McCoy

            Yes, they can be decoupled. We’re doing it at YourSports. Ping me @facebook-570120077:disqus chrism at yoursports and I’ll give you a look at how we’re doing it: A decoupled architecture is where the different components/layers that make up the system interact with each other using well-defined interfaces rather than depending tightly on each other. With such an architecture, the components/layers can be developed independently without having to wait for their dependencies to complete. This leads to pipelined development, resulting in more streamlined and faster development. This also improves testability of the components. Typically, decoupling the UI from its dependent backend brings more benefits and is often ignored. You can drive your web UI through well defined APIs that return JSON/XML/ATOM or whatever format convenient in your environment. With such APIs defined, the UI developers can use mock data during development instead of waiting for the backend developers to complete their tasks. Since the UI and backend developers produce their work in parallel, idle time and repeated integration can be minimized. Since UI developers are typically ahead in the development cycle, this helps backend developers in finalizing the data formats with minimum iteration
            .

          • http://www.puzzazz.com Roy Leban

            Thanks for schooling me on architecture design! I had no idea! Yeah, that’s sarcasm in case it’s not obvious. You are taking a best practice that I’ve been following for more then thirty years — designing systems so that pieces can be built, tested, deployed, etc. independently — and extending it to the idea that you should also design the pieces independently. Simply put, it is not even close to a good idea.

            It’s as if you want a spec for an elephant:
            http://en.wikipedia.org/wiki/Blind_men_and_an_elephant

            As my kids would say, good luck with that.

          • http://twitter.com/chrisamccoy Chris McCoy

            Why the haterade? :)

            Architecture isn’tbeing decoupled.Frontend UIand backend features are….Would love toshow you whatwe’re doing,would you be willin gto take a look?

          • http://www.puzzazz.com Roy Leban

            I’m not trying to be hateful and really, I should stop bothering to respond. You wrote:

            “Today, engineers rule the world. In reality, really good product people (owners) should.”
            — I disagree with both those statements.

            “That world exists when the product creation process is essentially standardized and de-risked so the “idea guy”–the quarterback of the design, user-experience, business logic, code, and deployment process–can go from product vision, design, data/code, and deployment as “lean/agile” and quick as possible.”
            — this is the route to bad products

            “Calling business people “business people” is somewhat derogatory”
            — I have found nobody who agrees with you

            “I think the process can be decoupled, therefore product design and product engineering are equally important.”
            — I know from lots of experience that the first part is wrong and the second part, while roughly true, is a non sequitur argument

            In your last post, you seem to be changing your argument into one about designing a decoupled system rather than saying the design process should be decoupled. To the extent that you’ve learned this, great. It’s not news to me or most of the people you’ve argued with in this post. Yeah, it’s a bit annoying to have you write to me as if I’m some guy with no experience who’s only been out of college a few years. That might have affected my tone.

            Believe it or not, I’m actually trying to help you. You just don’t know it yet.

          • http://twitter.com/chrisamccoy Chris McCoy

            Appreciate the response Roy. Follow-up thoughts:
            “Today, engineers rule the world. In reality, really good product people
            (owners) should.”
            — I disagree with both those statements.
            — In a startup sense, at least in SV, this is true as it relates to % of
            folks that get funded.

            “That world exists when the product creation process is essentially
            standardized and de-risked so the “idea guy”–the quarterback of the design,
            user-experience, business logic, code, and deployment process–can go from
            product vision, design, data/code, and deployment as “lean/agile” and quick
            as possible.”
            — this is the route to bad products
            — why?

            “Calling business people “business people” is somewhat derogatory”
            — I have found nobody who agrees with you
            — Do you read Hacker News?

            “I think the process can be decoupled, therefore product design and product
            engineering are equally important.”
            — I know from lots of experience that the first part is wrong and the
            second part, while roughly true, is a non sequitur argument
            — Design/UI and feature execution can’t be decoupled? I’m all ears here.
            It’s working for us (out of view).

            In your last post, you seem to be changing your argument into one about
            designing a decoupled system rather than saying the design process should be
            decoupled. To the extent that you’ve learned this, great. It’s not news to
            me or most of the people you’ve argued with in this post. Yeah, it’s a bit
            annoying to have you write to me as if I’m some guy with no experience who’s
            only been out of college a few years. That might have affected my tone.
            — Sorry about the tone, not my intention but do appreciate you calling me
            out on it. I’m a little fired about about the quality of consumer internet
            startups coming out of Seattle (particular UW) in proportion to the amount
            of talent. Sometimes I write with fire in my belly, but it’s the good kind.
            — Just to be clear, when talking about decoupling I’m not talking about
            architecture. Talking about connecting UI and backend through data as to
            decouple product design/UX from backend code. Goal is quicker iterations,
            more of a focus on the design and user-experience. It’s kind of what’s
            required to succeed in today’s consumer web IMHO.

            Believe it or not, I’m actually trying to help you. You just don’t know it
            yet
            — What if I’m trying to help you? Is that possible? j/k :) … I do
            appreciate you looking out.

          • George Plimpton

            I think the fact that you think the accurate name “business people” is derogatory is very telling. Should we change their name, like calling garbage men waste disposal engineers or something?

      • http://twitter.com/chrisamccoy Chris McCoy

        In startups, users, revenue, and/or data gathering rules. This is a product of the design, business logic, user-experience, and the code–not just the code. To see the product as the “code rules” is exactly why I wrote the rant, it’s one reason why large numbers of game-changing consumer startups aren’t being created in Seattle. Again, the product is a combination of the business logic, design, user-experience, and the code. Not just the code.

        If you read my reply Dan, I never mentioned not paying.

        • http://twitter.com/danshapiro Dan Shapiro

          I think you misunderstood my comment.

          If the CTO and CEO work together without salary to birth the project, then, all other things being equal, they deserve similar (give or take 5%) rewards. Or to rephrase it: the reason the technologist gets about half is because they’re taking about half the risk of working without pay.

          If you’re paying your technologist from Day 1, then they’re not a founder, and that’s a different topic.

          • http://twitter.com/chrisamccoy Chris McCoy

            I think if the “CEO” has an idea, they should take it to frontend interaction state as to recruit a technical co-founder that can build the architecture and MVP feature set. This will do wonders for their product cred, force them to learn a little bit of technical, and help them think through the short to mid-term vision for the company by rapidly prototyping and converting v1-v3 of the product into a reusable frontend demo state before backend feature execution.

            The CEO in actuality is the product owner and can really own the frontend of the product. Then their goal should be to understand the backend flow of tests-code/data-integration-deployment so they can never be hosed by their backend technical team. Ultimately, you can only manage what you can measure.

            In a decoupled architecture, this is really a perfect scenario. See my post on this topic here: http://www.quora.com/Startups/Should-I-seek-a-co-founder-before-or-after-building-a-prototype-for-my-startup

            As for “CEO”, I’ve always thought this was kind of silly to call a startup founder a CEO. You’re a CEO once you’ve raised a professional Series A. Until then, you’re a founder.

          • http://www.puzzazz.com Roy Leban

            You’ve written so much here that I don’t know where to respond. The idea that your “business guy” (there’s that term again) is going to be able to do everything except the little tiny details of implementation is just wrong. In my mind, “frontend interaction state” is one of those BS terms to let people pretend that tons of planning is a substitute for actually executing. And anybody worth anything knows that only big companies waste time on “integration”. Everybody else keeps everything “integrated” all the time. And scalability, just like a great UX, is not something you tack on later.

            If you’re going to make sure you only hire “tech people” (that other term) who can’t actually design and architect a good system, you’re going to get what you deserve.

            You might as well not hire anybody and just build your product in Zapd — I hear it lets you build a website from an iPhone.

            [Note on sarcasm: this is no slight on Zapd. It’s actually an awesome app. But there’s no pretense that it’s an application development system. And developers, tech people, whatever you want to call them who can’t architect your system are people you should only hire when you’ve got lots of managers.]

          • http://twitter.com/chrisamccoy Chris McCoy

            The issue is ‘can design, business logic, and user-experience be decoupled from code/integration and deployment’. So, can they be done in parallel? I think so. You?

          • http://www.puzzazz.com Roy Leban

            No, they can’t be decoupled. They can (and should) be done together, but not in parallel which implies they are independent. They are not independent and believing so is one reason why there are so many crappy products out there.

          • JD Vogt

            I’d agree with Roy. Great products do not come from a decoupling. In the words of Frank Lloyd Wright “Form follows function – that has been misunderstood. Form and function should be one, joined in a spiritual union.”

          • jb

            I think they can absolutely be decoupled to some extent. I’m a UX designer with quite a bit of experience in the start up world. Design, requirements, business plan, can all happen before any coding starts. In fact this is how a lot of products are built. We can build and test ideas using a whole number of tools before any code gets written…etc. Of course, I’d prob never start working on something that isn’t feasible and if I didn’t have any sort of domain knowledge on the feasibility of that product I’d 100% need a “tech guy” to validate. Obviously architecture is incredibly important, but more important than the product itself…no. With that in mind though, both are almost equally important. On any product inception it’s pretty integral to have a dev/engineer keyed in to big picture, you can’t just tack on scale at the end etc, or you’ll come to serious road blocks when adding features or iterating. IMO the best start up team is a designer+a developer. They both have the technical skills required to build products but also can be idea people, with their feet grounded into what is really possible and how to make it tangible. Everyone has ideas, but not everyone has the skills to make them a reality. And if you aren’t a designer or engineer/dev then you need to find those people and get them on board as early as possible.

          • http://www.puzzazz.com/ Roy Leban

            Don’t know why you’re posting on a 3-year-old article, but there is a huge flaw in your argument. You write “architecture is incredibly important, but more important than the product itself…no”. This shows a fundamental misunderstanding of what a product is. Do you think the product exists in a vacuum without architecture and without implementation? Would you say “Wings are incredibly important, but more important than the airplane? No.” or “Streets are incredibly important, but more important than the city? No.” Your logic is similar.

            Your idea that you just need the UX person is as bad an idea as saying you just need someone who can code. Those paths both lead to products that don’t work.

            Just to be clear, I am not a developer who hates UX people. I’ve done UX consulting for about 30 years, for large companies like IBM and Microsoft, and small companies like software startups, hardware startups, medical device startups, and many more. And I’ve done software architecture and development even longer, for a wider range of employers and clients.

    • http://theprogrammersparadox.blogspot.com Paul W. Homer

      You’re hugely undervaluing the technological efforts required to create really good products. Technology demands trade-offs, and these need to be made by people with in-depth knowledge and experience. Just wanting to create the next FaceBook isn’t enough, a great deal of the magic comes from knowing how to avoid the pitfalls along the way. Ideas and marketing are fine, but you need ‘inventors’ to invent. That’s why the 50/50 argument is important. As long as you continue to undervalue the effort, you’ll never attract the type of people who could produce a really good product. Just a bunch of flunkies ready to bail the moment the cash dies up.

      • http://twitter.com/chrisamccoy Chris McCoy

        I’m not hugely undervaluing anything. With processes like behavior driven development (evolution of test driven development), the test-writing can be shifted to the product owner/designer. And the tests can be written in a language grandma can understand, therefore creating a common technical language across all depts. of your company/organization. Feature execution can be much more predictable, therefore achievable for non-tech types.

        Basically, when you break the process of developing products down into repeatable steps, I think the same amount of “magic” happens with design, business, logic, and user-experience as with code, integration, deployment.

        It’s the process of who writes the tests that balances this out. Shifting tests into a common English language that can be written by the product designer/owner, then be tested post-code by the engineers democratizes product development. This is EXACTLY how Apple–one of the Top 10 consumer software companies on the planet–does things. Product owners/designers rule, not the engineers. I know because our CTO works there.

        If done correctly, even the secretary (or anyone in the org with a product idea) can rapidly prototype and write BDD tests for a feature/product that the engineering manager/product owner/developer can then review before it goes into feature execution/development.

        People want to be apart of something bigger than themselves. The product owner who can create that vision, then quarterback the process from start to finish, is hugely undervalued in the early venture creation process.

        • http://theprogrammersparadox.blogspot.com Paul W. Homer

          The battle isn’t won or lost in testing, that a quality control issue.

          A 10,000 ft view of a product is important, but at the end of the day it’s the details that matter. Hype only goes so far. Details that can’t be managed by someone that doesn’t understand them (or they get fumbled). You have to build something first, in order to sell it.

          A good CTO will also be a strong visionary for the product lines (and usually will be better at the longer term perspectives). For all of the products I’ve built, the original idea was only the starting place, both business and technology contribute to shift it into some successful (or not). You have to really understand both, which is an impossible skill set to find in a single being.

          I like Apple, they product slick products, but I’ve learned never to look under the hood. The recent iPhone debacle doesn’t help, I think Charlie Brooker said it best:

          http://www.guardian.co.uk/commentisfree/2011/feb/28/charlie-brooker-pfroblem-with-macs

          You can’t be part of something bigger if you want to do it all yourself. And you can’t do it yourself if you don’t have a deep understanding of how it works. If you don’t have a technical person that you trust and respect, you’ll get hosed. 65/35 shows an initial lack of respect for what someone brings to the table. It says “I don’t think your skills (which I don’t understand) are as valuable as mine”.

          • http://twitter.com/chrisamccoy Chris McCoy

            The battle for features is won at BDD. The battle for scalable code is won at integration.

            I respectively disagree with the “you have to build something first” approach to product development.

            You have to rapidly prototype and/or design something first that people can’t live without. Then build it a basic version of it. Then revise. Then rinse and repeat till you get it right.

            In today’s web, the product is combination of the UX, design, business logic, and the code. Not just the code anymore. Thankfully.

            Architecture is decoupled from the product. Takes a different skillset/mind to execute scalable architecture, especially as it relates to big data.

          • http://theprogrammersparadox.blogspot.com Paul W. Homer

            BDD is a process, nothing more. The web is littered with countless apps that all have basically the same feature set, but are ignored. Features aren’t why people use software.

            If you haven’t designed for scalability, it’s far too late to do anything at integration.

            A prototype is nothing more than a hollow test to play with ideas or technologies. You can’t sell that. Often, though it is necessary to ‘sell ahead of development’ but its a dangerous practice if you don’t actually know where development is headed.

            What makes a good product is ‘stickiness’. Whatever it is, has to stick to the users to make them give up something else in their life (money or time). Hopefully at least one of the founders will grok this nebulous concept, but it has been found by accident on occasion.

            For a large-scale web app like FaceBook, architecture is nearly everything. A site will fail faster than the speed of light if it starts grinding to a halt at a few thousand users. It’s the largest single hurdle that has to be jumped in order to compete in Web 2.0 market. And it doesn’t happen by accident. All the great ideas in the world come crashing to an abrupt halt if they don’t work (well enough).

          • http://twitter.com/chrisamccoy Chris McCoy

            BDD is much more than a process. It’s a fundamental shift in how features can be developed within a startup team or a product team within big co. like Apple. It’s a game-changer in product development, allows UX, product design, and business logic (data, revenue) to lead the process. Which is should.

            BDD does 2 things: 1) Changes the language of how tests are written so anyone in the organization can write them. Language is biggest issue in “biz vs. dev” schism btw. Shifting this responsibility requires “biz” or product design to really think through the product/feature before it goes to code. Product design, via BDD test writing, will be pretty baked before it goes into development; 2) Gives “biz” peace of mind a feature is executed if all tests they (and the developer) wrote. Not having peace of mind in product development is nightmare for entrepreneur. BDD solves this.

            Yes, you have to build stuff people want. Duh. :) But let’s be honest, some people are just better at guessing what people want than others. These are what I would call really good product people. They become great when they can lead the entire product process through fast iteration. Keyword: lead.

            Hence my original statement of these people should be highly valued in the startup ecosystem. Leading design, business logic, user-experience, code, and deployment isn’t easy.

            Architecture is decoupled from the product creation process, and yes, it’s wise to figure it out (or have a plan) before you get into a build.

            If it does become a problem, it’s a good problem to have–you can overcome it. But definitely costly.

          • http://theprogrammersparadox.blogspot.com Paul W. Homer

            Beware the ‘game-changer’. They sound great, but leave everyone crying in the end. Tech has a long and inglorious history of hyping these revolutionary new methods that are supposed to avoid the pain. But they rely on trade-offs that only make it worse…

            If everyone contributes, it’ll look like it came out of IBM. People don’t want ‘features’, they want something that is simple and that works. To get that, the work need focus.

            You hit a key point with leadership. It is vital. The problem is that leadership in the business arena is very different from leadership in the technical one. If you ignore the latter, and try to distribute it amongst the masses, the lack of continuity will sink the ship.

            For stickiness, guessing is necessary. For engineering, knowledge and experience are required. You shouldn’t be guessing at how deep to dig a foundation for a skyscraper, for instance.

            A flawed architecture is something you can’t overcome. You pretty much have to go back to square one, and do it all over again. That’s fine if you have the breathing room, but fatal if you don’t (and you usually don’t).

          • http://twitter.com/chrisamccoy Chris McCoy

            Biz doesn’t speak tech. Therefore can’t manage tech with biz words. That’s the biggest problem in product development, from my experience.

            Language is the divide.

            BDD creates common language.

            It’s a big deal. And is different than the other stuff out there.

            I think I’m right on this one, we’ll see with YourSports.

            Again, architecture is different than features, which I think we both agree on.

        • BlogReader

          If done correctly, even the secretary (or anyone in the org with a product idea) can rapidly prototype and write BDD tests for a feature/product that the engineering manager/product owner/developer can then review before it goes into feature execution/development.

          That’s like saying “If done correctly, exercise can lead to weight loss” It is almost an axiom.

          • http://twitter.com/chrisamccoy Chris McCoy

            Thanks BlogReader

    • http://richard.watson.name/ Richard Watson

      In McKinsey, the consultants are the superstars. In banking, often the traders are. At Apple, the designers are. At Google, the coders. These are different businesses that have a core group who aren’t commodities.

      Different types of startups will similarly have different cores. Knowing how to differentiate between them is the key.

  • http://www.johnwedgwood.com John Wedgwood

    This is such a great post. My own experience is that a 50:50 split can be the right one, but having a lot of trust and history helps a ton in making that work.

    I think there is also another distinction inside your founder category. I’ve seen founding teams all working without pay, but with one person writing the checks. If the company needs $5,000 to pay for servers and travel, who kicks in money to make it possible to write that check matters a lot.

    • http://twitter.com/danshapiro Dan Shapiro

      Thanks John. I think I covered that in the “Treat cash like an investment”, but it’s worth noting that a better structure is to start out seeding the company with $X and treat that $X like a company asset then having one founder act as a not-really-bottomless bank account. It makes just about everything easier: the accounting, the equity, the budgeting, and it helps to reinforce to everyone that the cash is a finite resource.

    • http://twitter.com/danshapiro Dan Shapiro

      Thanks John. I think I covered that in the “Treat cash like an investment”, but it’s worth noting that a better structure is to start out seeding the company with $X and treat that $X like a company asset then having one founder act as a not-really-bottomless bank account. It makes just about everything easier: the accounting, the equity, the budgeting, and it helps to reinforce to everyone that the cash is a finite resource.

  • http://www.blueoceanwebsolutions.com Dheeraj Kapooor

    A perfect timing for this article. Been involved in some negotiations and it helped a lot. I am sure figures are debatable over here, but they are good starting point for any discussion.

  • Anonymous

    I really like the post as well, and I’m in the mostly agree camp. 50/50 almost never is the right exact split – someone nearly always brings more to the table, and, even if they don’t, someone ALWAYS has the more public face. That person should get the bigger chunk – they are putting more on the line.

    Regardless – this is a great “rule of thumb” to address an issue, that, if left unsettled, just gets worse over time.

  • http://www.wac6.typepad.com William Carleton

    Dan, I especially like what you said you said to the lawyers: “If there’s one thing you can do to help your clients – really help them – it’s to get the hard questions on the table early and help them work through them together.” I’m going to reference that a lot.

    • http://twitter.com/danshapiro Dan Shapiro

      Thanks William. I believe that’s the difference between good and great startup attorneys: identifying problems vs. helping to solve problems.

      Come to think of it, that’s the difference between good and great startup folks of any stripe. :)

  • http://www.wac6.typepad.com William Carleton

    Dan, I especially like what you said you said to the lawyers: “If there’s one thing you can do to help your clients – really help them – it’s to get the hard questions on the table early and help them work through them together.” I’m going to reference that a lot.

  • http://blog.redfin.com GlennKelman

    What this excellent post loses sight of is what’s most precious about a co-founder, that he is your partner, even if you are firmly established as the CEO. You need someone equally invested in the venture, and, if you are secure in your power, you need someone to stand up to you, too.

    Splitting the equity unevenly would make more sense if you had any idea who is going to contribute the most value to the company over its hopefully long life, but in fact you don’t. I’ve always been surprised who lasts and who doesn’t, who weighs in and who rides along.

    In the end, what difference does a few points make? If the startup is a success you will be a millionaire, probably many times over. Whatever you could buy with 60% of the founders’ equity, you could buy with 50%. What you will value more at that point in your life is that your old partner will still be your partner, like Eddie and Dan at the end of Trading Places.

    A likely outcome for a startup is failure, and one of the primary reasons for it is that the band can’t stay together through the tough times. The PRODUCT is the thing, the TEAM is the thing, the JOURNEY is the thing. Keep it simple, don’t play games, and be generous with one another.

  • http://www.facebook.com/bill.harding2 Bill Harding

    Wow, yet another great Geekwire post with yet another well-rationed and non-trolly comment thread following! I think John & Todd are really on to something here.

    Also, Dan’s precise articulation of an extremely complex & thorny topic here makes me jealous. As is typical of his writing. I hope you’re proud of yourself, smarty pants.

  • http://twitter.com/OptionSanity Option Sanity™

    (I also left this comment at Fred Wilson’s post at AO (http://bit.ly/lw6BpN). Since it says what needs to be said I didn’t rewrite it. If that’s a blooper my apologies.)

    I read Joel Spolsky’s full post with interest, (I couldn’t comment there, since commenting requires a certain reputation level.)

    I believe it’s important to tie stock allocation tightly to a startup’s values and culture in a way that is transparent in order to provide a large dose of authenticity for any startup that claims fairness as a basic value of its culture.

    In Joel’s approach ‘levels’ refers to the order of hiring. The obvious problem with this is that you don’t need people of the same talent level in the same calendar time, so if you have to hire a receptionist in the first year at level 2, they would get as much stock as a Vice President of Sales hired at the same time. And if you don’t need a Vice President of Operations until the second year, she is only a level 3, despite the large contribution that might be asked of her.

    In addition, to be truly fair, you need to take into account a number of other things, such as the position’s ability to influence the success of the company, as opposed to the person in that position, since that can change; future performance as opposed to past accomplishments; risk reduction is a matter or achieving well thought out milestones as opposed to strictly the time factor; a way to use stock to focus everyone’s performance on well-defined, quantifiable annual company objectives; etc.

    Our new product is called Option Sanity and there is a site by that name. It addresses everything I’ve mentioned and more.

    Miki Saxon

  • http://profiles.google.com/dennisgorelik Dennis Gorelik

    Thanks Dan!
    When I was reading Joel’s advice I noticed some of the issues you pinpointed:
    – If a co-founder works without salary it worth much, much more than the same amount of money paid back after start-up is successful.
    – 50/50 split is risky.
    Thank you for reconfirming it for me and thank you for noticing that Joel suggests giving salaried employees more stock than usual.

  • http://www.facebook.com/profile.php?id=682331013 Ram P Singh

    1. I think equal split is ok if the potential and experiences mostly match up, though not because it’s easier to do it that way. It keeps everybody equally motivated. Doing an unequal split just to be able to “resolve” conflicts is perhaps not a good idea, as you really just end up giving a brute force upper hand to one party.

    2. Ideas are dime a dozen. Execution matters. In a company where any extra weightage is given to the person with the initial idea, there’s always a tension about who really had the idea. If the original idea is shown to be bad, and the company changes direction along a different idea, there can be (bordering-on-unethical) tendencies for people to not give credit to the next idea person – because that would render their original claim for higher “idea” equity baseless or at the very least hurt their ego. And I have actually seen people wanting credit for ideas which really were not unique and distinguished but more along the lines of “let’s do another daily deals site” :)

    3. I think the exercise of determining the net value of the company, the % of that value any investment is, the % cut for anyone drawing a salary from that investment, etc is important. Not everybody going into the same startup might be equal. So, a person with more potential and experience who gives up a higher paying job + takes no pay + puts in some of his own money for operational expenses + steers the company in a direction he is convicted about cannot be expected to split equally with a junior person with less potential/experience + who draws a salary + who is mostly just following along.

  • Anonymous

    I would really appreciate if you could give me your opinion on something.

    A friend of mine has an idea that he wants to eventually turn into profit. He wants to be the CEO (he’s not going to be developing the actual application) and still thinks that we should split any profits 50/50. He’s going to be the one that’s going to cover the expenses of registering a company (I’m from Europe, I don’t know how these things work in USA) and that’s pretty much it. Also, he’s going to “hunt down” future customers.

    My question is what do you do in this situation ? Of course, splitting the profits 50/50 when I’m the only one that’s actually working is a Stupid Idea and I’m definitely not going down that road. Also, please note that I will not be receiving a salary for the development.

    p.s. I’m sorry, English is my second language.

    • http://twitter.com/danshapiro Dan Shapiro

      If you’re full time and this person is not, then this does not sound like a good arrangement.

      Also note that splitting revenue is not the issue. If your partner owns the code, they can start a new company with it, and keep all the revenue from the new company. You need the company to own all the intellectual property, code, etc, and split ownership of the company.

  • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

    i absolutely love this post for the simple reason that it’s ignited a community conversation about something that is seldom discussed publicly. i like to say that founding startups is really akin to entering into a marriage. and this post gives us great visibility into how we all should think about “pre-nups.”

    from my own past experiences i find myself in agreement with most of dan’s points; who’s considered a ‘founder’, the modest realities of founders’ typically having no compensation at start, and the impact of creating differences (even small) in ownership %’s amongst the founding group. i’ve done startups that have conformed to these, and at times selectively not conformed. here are some other interesting things i’ve also found to be true;

    1) no matter how humble seeming, most startup founders generally tend to have outsized views of their own contributions to the end value created (especially in retrospect). its simply human nature. i’ve been reading todd’s recent coverage of the paul allen book (and mike koss’s great counterpoint from this morning), its clear that these different perspectives can persist for years and even become the thrust of future memoirs. thus, i’ve never been a part of a startup where all co-founders were completely happy with their respective equity %’s. there’s always some niggling doubt on the part of somebody that they’re getting a bit screwed. but as dan mentioned the secret to startup success is that all parties can simply agree to move on despite their differences.

    2) equity %’s need to account for one more dimension; time. another truism is that co-founders simply have vastly different levels of contribution depending where the startup is in its life cycle, and humans have a tendency to overvalue the ‘here and now.’ a startup ceo may not be an engineer and thus not code, and its tempting for the other co-founders who are engineers to consider his contributions to be much less at incorporation. the fact that in the future the company may exit at a fantastic price because the ceo picked the right business model, hired the right team, and drafted the right product plan (3 of the 4 key deliverables of a great ceo) tends to be highly difficult to quantify. i’d venture to guess that most co-founders who are non-engineers in this town (where companies like MSFT have normalized the world to paying engineers with more stock compensation than other functional areas) tend to walk in with this handicap to overcome. i for one appreciate dan’s re-surfacing the often not discussed attributes of; reputation/bankability, ability to raise capital, product sensibilities, etc… and furthermore arguing in favor of these things having incremental equity points above 50%.

    3) that said, glenn is right in that it is simply too hard to make sense of who is going to contribute the most value to the company that to split the equity unevenly is presumptuous and hard. as i’ve mentioned i’ve done it both ways and here’s how it pivots for me;

    if the founding team has all of the following factors present;
    – predominantly engineers
    – highly data driven in decision making
    – their own careers raised from traditional ‘heirarchical’ organizations & decision making processes
    – group has little or no past working history

    then you are best served to do the unequal split so that you have a crystal clear path to decision closure. this is not the heavy handed approach that some have referenced, but quite the opposite. its agreeing up front who has final say so you never have to stay in the morass for too long.

    if on the other had the founding team exhibits the following factors;
    – already a natural, easily discernible acknowledgment (deference even) to one or more of the founding members as more experienced, a benevolent dictator, or simply a rational tie breaker.
    – communication hygiene is super high, and founders always approach conflict resolution from the perspective of ‘i may not be right and i’m open to my mind being changed’
    – communication is frequent

    then you can get away with the equal split. but to dan’s point, this would be more about easy, than fair.

    at any rate, no hard right or wrong. great post and great points from all around.

    jonathan

  • http://twitter.com/topscientist Top Scientist

    This is the most incoherent article I’ve read in a long time. It reads like somebody’s random thoughts, scratched on the back of an envelope.

  • Brad

    Excellent topic and thread into the dna of the entrepreneur.  Based on the feedback and collective wisdom here, I was hoping I might seek some group advice.  

    I am in the midst of my first start-up as a co-founder at a 50/50 split.  We each bring complimentary skills to the table, have an agreed upon advisor to help with split-decisions, and mapping back to the marriage analogy, have a mutual respect for each other’s contributions.  We’ve made it through year 1 – barely – and now find ourselves in some unfamiliar waters that is putting the equity split and near term direction in question.As co-founders, we have been able to outsource our labor and manage with long nights and weekends.  But that has only gotten us so far.  We are both in agreement that one of us needs to be full-time on the job.  At the same time we are seeking a round of funding from friends and family investment – to cover off on product upgrades and the founder’s full-time compensation.  After courting an investor for the past few months, and having what we thought to be a deal in place, he aired his grievance with the plan to have one paid founder – saying it would likely detour future investment and devalue the company.This seems somewhat counter intuitive as we feel e need to have someone on 24/7.  The value a founder at the helm would add seems to be worth more for an investment partner then compensation would be.  As a novice in this area and as the saying goes – I’d gladly pay you Tuesday for a bit of advice today.Thanks!

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  • Rohan Jain

    Nice article… We at EquityZen had to go through some similar issues. You can check out our thoughts on it here:
    https://equityzen.com/blog/how-to-split-equity-among-founders/

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