Splitting Your Equity With New Co-Founders; 10 Business Lessons I Got From Great Minds On Twitter
On January 26, 2022, I made the following question to MacTheVC.eth on Twitter:
Mac, I built a technology that is advanced and ready to go to market (validated, and I invested ~600K), and I want to involve 2 more co-founders for critical roles to go big. How would you divide the equity? What is the maximum dilution you would take in series A? Thanks in advance.
MacTheVC (@macConwell), Pauls Smith (@paul_a_smith), Zach Poag (@zthething), Tuvia Elbaum (@tuviae), OBADEYI Idowu (@idbaddo), Peter Walker (@PeterJ_Walker), and Sharif V (@thescribblr) gave me more insight than any classroom ever did. Here is the breakdown:
- Founder title and equity award are two different things. Co-founder is an emotional title, not legal.
2. Everyone has different motivations to be part of a startup.
3. Ask yourself, “Why do you need co-founders or partners?”, and be honest. Do you need help because you want things to be better and bigger? Or is it because you cannot do it alone?
4. Equity expectations will depend on each individual and their situation.
5. Equity should be “cliff vested”, meaning, you give the equity over time and goals achieved. More information on Investopedia.
6. If you or your initial team have already invested in building the product and validated it in the market, 2 -10% of equity plus a salary is a reasonable offer for a new person who can be a true rockstar to get you to the “next level.” Ask yourself, “How much percentage do you think this new person will increase your company’s value? How much more likely do they make your raise? Pay aside, what will inspire them to rage for the next 36 months as customers leap into it?” Set clear expectations like $X in sales, followed by a $Y investment on $Z valuation.
7. Only 41% of two-founder teams split the equity equally. And that percentage is much lower for 3, 4, and 5-founder teams. More information on Carta.
8. A VC will expect the founding team to keep at least 50% of the decision power after series A. Ideal is 60%.
9. Consider the following additional questions once you bring in a co-founder: What intellectual property does the startup have? Is the co-founder putting in or facilitating money? Or is it just sweat equity? Do you want someone that is involved daily or occasionally? Do you want a set time co-founder or an indefinite one? What are the dividends this co-founder will get?
10. Always consider the possibility of positioning co-founders equally at the start with a vesting period to allow you to measure organizational fit and outline a clause for them to buy more after a certain period to see their commitment.
Finally, as the principal founder, make sure you retain stock for the majority of the vote if you are CEO. You can always ask for your team’s input without compromising your decision power, especially at the board of directors. Remember, your team is your ally in making the business successful.
The content of this blog post does not constitute any legal or financial advice from the author or the individuals referenced.
Reach out on Twitter for more crowd lessons. JayXAnaya
