Good and Bad Reasons for Unequal Co-founder Equity Splits

Startup co-founder equity discussions can be uncomfortable. After having had a few of these conversations, I know that wasting time and emotional energy negotiating when the relationship or the startup doesn’t survive long enough to matter sucks.

Assuming you’ve gotten to a point where it makes sense to talk about equity splits, I’m generally a fan of: the closer to equal, the better. A good co-founder doesn’t add to your chances of succeeding, they multiply them. A good co-founder will make the difference between the startup surviving or not.

It’s usually ego that causes some founders to think they deserve more equity. We’ve all met the idea person who thinks they hold all the value and just need someone to help them build the magical product they know will succeed. Bullshit. Unless you have something valuable, you’ve got nothing, and you don’t deserve more equity.

Good Reasons

Here are some valid reasons for having more equity than your co-founder. These things actually move the needle for people considering joining you.

1. You have revenue.
2. You have customers.
3. You have an email list of 10k+ people wanting to try your product.
4. You’ve raised funding.
5. Your past success gives you an unfair advantage in getting customers and/or fundraising and you have proof of that advantage.

Bullshit Reasons

Here are some invalid reasons. I know this can be painful for some people to realize. This doesn’t minimize the cost or learning — they just aren’t relevant to the equity discussion of a new startup.

1. You spent months doing a different startup idea.
2. You’ve been pitching investors, but haven’t gotten a term sheet yet.
3. You worked in the industry you want to start something in, but haven’t gotten any customers yet.
4. You’ve done customer development with any number of potential customers, but have no customers yet.
5. You incorporated.
6. Your co-founder can’t go full-time yet. (see note below)
7. You purchased a domain.
8. You have an idea.

Other Considerations

Some people believe that it’s best if one co-founder holds a majority stake in the company. If you don’t agree on that in the beginning, default to an equal split and agree that you can renegotiate later when it matters. Lots of things can happen between the very beginning and then.

If your co-founder can’t go full-time on the startup, this isn’t always a great reason to give them less equity. Allowing someone to keep their job might be the only way they could transition to becoming your co-founder. It’s much more important to think about the future. If the startup survives, your co-founder won’t remain part-time, and when that change occurs, the equity penalty won’t make sense and will feel unfair. There’s more nuance to this one, so google for more insights and talk to other founders if this concerns you.

Playing with how to divide up a currently worthless piece of pie isn’t the most important work you can do right now. The real pie doesn’t exist yet — you and your co-founders need to make it. Get as close to equal as possible so you can move onto the real work quickly.