Continuing with yesterday’s post on Co-Founder Equity Ideas, there’s another point that needs to be made: adding a third co-founder can be one of the most “expensive” things a founder does, assuming equally split equity. Think about the standard scenario where there are two co-founders, each with 50% of the company. Now, introduce a third, equal co-founder where each has 33% of the company. The original two founders would have 33% less — that’s a huge amount of dilution.
Here are a few thoughts on a third co-founder:
- Two co-founders is almost always better than three, especially when there isn’t a clear division of responsibilities, as it’s easier to make decisions and get everyone on the same page
- Adding a third co-founder with equal equity results in substantial dilution for the first two co-founders
- Consider adding the third co-founder down the road once the startup has made more progress and the co-founder can be brought on at a different equity level (they could be an advisor in the interim)
- If the startup raises money, there’s often the ability to pay more salary and less co-founder-level equity, such that the dilution from the investment is better overall for the original founders
Think about the great tech success stories like Apple, Amazon, and Google — there’s rarely more than two co-founders. Know that having a third co-founder is rare and brings with it a high cost.
What else? What are some more thoughts on the high cost of a third co-founder?