A common question between co-founders when they start a new venture, is how to split their shares in the startup.
Let’s suppose that you have an idea for a startup and you decide to co-fund your startup with another two persons. So, you are three co-founders. Should you split equally the equity in your startup and get 33.3% each?
Actually, you should not do it. Although this is the way most startups choose to start, especially if the other two are friends of yours, you should take under consideration several factors to determine what is the fair way to split the equity in your startup.
Here are some questions to take under consideration, when deciding about the split of equity among co-founders:
- Who had the original idea?
- Who is the CEO?
- Who pitches to investors?
- Who writes code?
- Who is working part-time, with the promise to turn into full time when the startup takes off?
- Who runs the online digital marketing campaigns and does content marketing with blog posting?
- Who is paying at the moment for the business expenses?
- Who has the most connections in your targeted industry?
- Who could become the CTO of the company if you hire many developers in the future?
- Who is the co-founder that if he leaves, you will have much fewer possibilities to raise funds?
- Are you going to give a small percentage to advisors? (Typically advisors get 1% in the company)
- What is the market value of each co-founder at the moment? Meaning, what would be his/her salary if he was employed by a company?
- How many startups has each founder founded in the past? What was the biggest achievement that they had in the previous startups?
- Has any co-founder participated in an accelerator in the past?
- How many hours has each co-founder contributed to the project up to now? And what would be the cost per hour for his/her expertise?
Answering all these questions will provide to the co-founders team with a better understanding of what should be a fair split of equity. There is no formula that works perfectly to define the equity split. You will have to make up yours. Having said that, there are several online tools that could be used to help you understand the gravity and the “special weight” of each of these factors.
Here are some of them: