Why a 50/50 Split is Almost Never Right for Co-Founders

Posted by Jonathan Greechan on 2012-02-22

Founder Feedback gives you insights from the startup trenches.

In a post on his blog, Dave Parker, Mentor for the Seattle Founder Instituteexplains why spiltting equity 50/50 amongst co-founders is almost never the right answer, because each co-founder will have their own expectations, commitment, and goals regarding the startup.  

The original article was posted here. Below it is republished.

 

"I was asked a question last week about co-founder compensation - specifically about guidance around splitting equity and salary requirements for the early contributors of a new startup.

The person was asking for benchmark data on percentages to validate the right thing to do between two co-founders and one early employee that had more demanding salary needs.

Let me start by saying I think the only wrong answer in how to split co-founder equity is 50/50. All a 50/50 decision shows is that in the first significant company decision you have faced as co-founders, you have bailed out and taken the easy path. The problem is, both you and your co-founder have entered into an agreement that most first time entrepreneurs have no idea about. Now, let me clear here - there are exceptions to this advice where 50/50 worked… but those exceptions are similar to having a “billion dollar pre-revenue company."

At the front end of the process, here are some things you need to consider:

  • Who’s idea is it?
  • Who’s putting in the startup cash?
  • Who has the passion for the idea?
  • Do you have the same work ethic?
  • Will you work for the same salary?
  • Will you have the same duties?
  • Will both of you sign personal guarantees?

Doing a startup is hard. It’s easy to gloss over these things when all you see is upside. But on the other end, it's hard when you are getting asked to sign a personal guarantee. Make sure you talk through the above items before you decide how to split your company equity.

Now, you’ve got through round one. It’s time to work through round two of the dialog. Compensation and outcomes.

  • Do you have the same compensation needs/expectations? For example, can one of you work for free, but the other one needs to be paid? Does one person have a family and is used to making $180K a year, while the other can work for $90K?
  • What are your desired exit outcomes? One person may define success as a billion dollars, while the other would be happy to pay off their house and children's college tuitions.These factors will significantly influence your risk tolerance along the way.

All of these things impact how equity is split and how you get paid in cash. Let’s be clear - both of you have expectations for compensation. And, each of you have higher expectations then you have voiced to your co-founder. Voice those expectations now vs. later… it will never get easier.

Complete these items by writing them down separately and then walk though them over a beer with your co-founder. After you’ve had a couple of days to process the information, then decide how you should split the stock…"

(Shared Puzzle image via Shutterstock)

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