This post includes extra content from Startup Mixology, my upcoming book on starting up – including how to prepare yourself for the harsh reality and celebrate positive moments along the way. Go here to pre-order the book (due July 8) and subscribe to updates!
In early 2013, ousted Snapchat cofounder Reggie Brown filed a lawsuit for one-third of the ownership of the hot startup. In the infamous Facebook lawsuit, the Winklevoss twins’ ConnectU filed a lawsuit against Facebook that was eventually settled for $20 million cash plus Facebook stock.
Splitting ownership at your startup is no joke. Even if you don’t end up as big as Snapchat or Facebook, putting off the decision to divide up equity can lead to annoyance, or much worse. But what’s the best way to do it?
The common view is that equity shouldn’t be split equally among cofounders. However, every situation is a little different depending on when you found your cofounders and what you agreed to when they came on board.
Startup lawyer Ryan Roberts suggests that equity should be calculated based on past contributions, like the initial idea, business plan, cash, and IP; and based on future contributions like time, sacrifices made, and industry expertise. He says it will rarely turn out 50/50. And he doesn’t believe it has to be a complicated, time-consuming calculation. Splitting up equity in a way other than 50/50 will help you learn to hash out hard decisions among the cofounders, which is a useful skill for the future.
Mike Moyer, author of Slicing Pie, recommends that you establish a “Grunt Fund” where your portion of the equity is allocated dynamically according to contributions like time, money, IP, services, equipment, and relationships. Then, you should agree on a way to calculate value and track it over time. That’s a more complicated method, but possibly more fair because it takes into account contributions over time.
But some people do argue in favor of a simple 50/50 equity split. Software engineer Joel Spolsky says that the most important thing is the perception of fairness, and splitting 50/50 can help you avoid inevitable disputes. Ideas don’t have much value, he says, so you shouldn’t get extra if you had the idea. For other types of contributions (like equipment, cash, and not taking salary), he recommends giving IOUs and paying them later when the company does well.
It’s up to you, but make a decision now. If you’re destined to succeed, it could save you millions; if you’ve got big obstacles in your path, it could help your cofounders feel more committed. Either way, you win.