One question I really like to ask idea stage entrepreneurs is how they’ve split up their equity. Now, for a startup with traction, investors, etc that question can be like asking how much money someone makes, so take it lightly. For two entrepreneurs that are just getting started on their idea, it’s usually no big deal. Almost always the answer to that question is that the equity has been split evenly among the founders.
Joel Spolsky, who’s famous in the startup world, argues that equity should be split 50/50. When entrepreneurs ask for advice on splitting equity, I take the 50/50 split approach and add slightly more nuance to it as follows:
- Start with a 50/50 equity split (rarely should there be three or more co-founders)
- Add an employee stock option pool of 10% of the equity (so now the founders each have 45%)
- Come up with an arbitrary valuation for the business, say $500,000, and use that to determine contribution values like:
– Salary differences where one person needs $50k/year to live off of and the other person needs $30k/year, then that $20k delta for year one would count towards more equity at the valuation
– Money invested in the business by each founder would take place at that valuation
In the end, the founders, outside the stock option pool, might have a 60/40 split, which is a better representation of monetary contribution and extraction from the company.
What else? What are your thoughts on this quick method to decide on co-founder equity splits?
David Cummings on Startups 
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