Equity share

How to Split Equity Among Co-Founders

On Quora you can find dozens of questions about how to split equity among co-founders. Some of them have hundreds of thousands of views and over one thousand of followers. Let’s try to simplify this problem and turn into re-usable decision-making framework, based on data from equity calculator on Foundrs.com.

Startup Equity Framework

General

A share of equity in a company should reflect partner’s contribution to the business.

There are many possible forms of contribution. Financial contribution is important, however not the most critical and certainly not sufficient at the early stage of the startup.

At the beginning, founders have to play various roles to make the company survive. Someone’s to act as a CEO, someone must overview development process and someone must help with contacting key partners and influencers. According to the equity calculator on Foundrs.com, there are 15 main roles that founders can play.

Each co-founder can play more than one role and one role can be played by different co-founders. The exceptions are: CEO, Manager of IT and the Pitch Person – only one person can act as each of these roles.

For playing a role, the co-founder gains (or in one case – loses) points. The sum of points of all co-founders represents the total equity.  The co-founder’ share is proportional to his/her share of points.

Below see the list of roles along with number of points:

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Roles Overview

The full list of roles:

1. The Pitch Person – a person who pitches the investors.  (+1083 pts)
2. Financially Involved with Daily Costs – a person who is involved financially in everyday operations and pays for current business expenses. (+1083 pts)
3. Current CEO – well, this is obvious. (+1000 pts)
4. Investors’ Favourite – without this person, raising would get very tough. It can be about the experience (ex-Googler), education background (Ivy League) or personal brand.  (+1000 pts)
5. Networker – a person who is well connected in the industry and knows the right journalists, influencers, and partners. (+1000 pts)
6. The Owner of the Original Idea – the one who came up with the business idea and shared it with other founders. (+961 pts)
7. Manager of IT – potential or current manager of developers. (+961 pts)
8 .IT Development Mastermind – a person making sure that IT development meets deadline and quality requirements. (+961 pts)
9.Monetisation Guru – a person who can greatly help with generating revenue. (+923 pts)
10. Developer #1 – the founder who’ve coded most of the website / app. (+852 pts)
11. Product Leader – a person who generates the majority of product ideas / feature ideas. (+818 pts)
12. Growth / Initial Traction Expert – a person who is capable of building early traction for the startup. (+786 pts)
13. Planner / CFO / Analyst – a person who prepares plans, budgets and estimations. (+667 pts)
14. Copywriter / Blogger – a person who writes copy on the website or runs a professional blog. (+220 pts)
15. Part-time commitment – a person who is currently engaged only on a part-time basis. (-220 pts)

Questions

Each of these roles can be identified by the following questions (as per Foundrs.com):

1. Who is the CEO? (Current CEO)
2. Which founders are coding most of the site/app? (Developer #1)
3. Who had the original idea and told the others? (The Owner of the Original Idea)
4. If you could magically hire a few developers, would one of the founders become their manager, and if so, who? (Manager of IT)
5. Which founders are working part-time and will join full-time once you get funding? (Part-time commitment)
6. If this founder left, it would severely impact your chances of raising funding. (Investors’ Favourite)
7. If this founder left, your development schedule would be severely impacted (IT Development Mastermind)
8. If this founder left, it would compromise your launch or initial traction (Growth / Initial Traction Expert)
9. If this founder left, it would probably prevent us from generating revenue quickly (Monetisation Guru)
10. Who writes the blog and the marketing copy that goes on the site? (Copywriter/Blogger)
11. Who comes up with the most features? (Product Leader)
12. Who has a spreadsheet with budget estimates and simulations? (Planner / CFO / Analyst)
13. So far, who pays for basic business expenses like printing business cards, web hosting? (Financially Involved with Daily Costs)
14. Who pitches investors? (The Pitch Person)
15. Who is well connected with your target industry, providing introductions to potential customers, journalists and influencers? (Networker)

Note

Do not pay attention to the exact numbers of points. For the most roles, they are on a similar level, ranging from 900 to 1100 pts. Only Copywriter / Blogger’s role is significantly smaller (+220 pts) and Part-time Commitment has a small negative impact (-220 pts). Feel free to edit the numbers if you think they should be adjusted. The numbers presented in this article comes from Startup Equity Calculator on Foundrs.com, and as author claims, they are based on 3 years of one-to-one discussions with entrepreneurs.

If you think that some roles are missing or some are irrelevant, feel free to edit this framework. It is supposed to act as a template for equity share decision-making.

Case Studies

Let’s consider few case studies to see how this framework works in practice.

Case 1

Screen Shot 2016-04-19 at 09.59.30

Imagine we have two founders. The first one is currently a CEO. She originally came up with the business idea. She is also the pitch person and a product leader.

The second founder is a developer with strong analytical skills. She owns all the plans, budgets, and simulations and because of that, she is critical to the fundraising process. Both founders are financially involved with business operations.

According to the framework, the first founder has the total of 4945 points, which represents 58% of total equity. The second one has 3602 points and 42% share. Taking into consideration that most of the critical business-related functions are on the side of the first founder (CEO, pitching, product) it makes sense to assign slightly more equity to this person.

Case 2

Let’s analyse another case.

Screen Shot 2016-04-19 at 10.05.48

This time, the first co-founder is CEO and the pitch person. He is also well-connected in the industry and can help with an introduction to partners, influencers, and journalists. He is solely involved in covering the current business expenses. On the other hand, we have a person who is the owner of the original idea, manages the IT, has coded the first version of the app and knows the development process better than anyone.

According to the framework, the first co-founder should have a slightly higher share of 53% and the second one – 47%.

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Hope you will find this framework useful. Feel free to share any comments or suggestions!

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