Recently an entrepreneur was asking me for ideas on setting up an equity arrangement with his co-founder for their new startup. Over the years I’ve seen a variety of arrangements, both good and bad. Here are some of the key ideas:
- Require Vesting – Yes, everyone is in this and fully committed. Only, things can, and do, change. Have a vesting period (typically four years) with a one year cliff and full acceleration on change of control. And, when raising money, expect investors to ask for founder vesting (some amount recognized for time served and some amount remaining).
- Don’t Delay the Ownership Conversation – Co-founders are so excited, and focused, on their idea that they wait too long to have the ownership and equity splits conversation. Have the conversation right away and make sure everyone is bought in.
- Do Equal Ownership Splits or Value-Based Splits – Equal equity ownership is the most common approach I see (e.g. two founders each with 50% of the company). Another approach I see is one based on some form of value the founders bring to the table (e.g. if one is more senior or has been working on the idea before bringing on the other, then there’s an unequal split).
- Have a Buy/Sell – One more critical item is having a buy/sell agreement that outlines to potentially buy out a co-founder if he or she leaves. A simple buy/sell formula or plan is recommended.
- Document the Commitment – Write down what each person will be doing, how much time they’ll be spending, and any other expectations to earn their equity. I’ve seen several examples where a co-founder ended up not being a co-founder and instead was more of an advisor or consultant.
Choosing a co-founder is often one of the most important decisions an entrepreneur makes. Document the relationship and follow these best practices.
What else? What are some more co-founder equity ideas?
One thought on “Co-Founder Equity Ideas”
Vesting is essential (especially a cliff), but I respectfully disagree with pushing for the equity discussion out of the gates. As you allude to, contribution levels and roles are highly subject to change, and it’s best to evaluate after the company is down the path. As long as you have chosen to work with reasonable people, I’ve always brought in objective third-party data to settle on the appropriate split. Founder’s Dilemma is the best resource out there and provides a great framework for the equity discussion. It’s unfair to be locked into certain splits from Day 1 when it’s based on pure speculation.