Dividing Founder Equity in the Very Beginning

I’ve probably had a thousand or more discussions about startup equity: figuring out how much to offer, negotiating, or advising others. It’s a very tricky topic: in part because it’s nearly impossible to compare ownership between two companies with completely different contexts. One-percent of startup A may have a vastly different potential value than 1% of startup B.

In practice, most equity grants within a company are driven by broad calibrations with existing employees. If an early very experienced developer has 1%, and a less senior dev has 0.5%, those become two reference points for the next dev hire. Over time, grants usually taper down — things advance and (presumably) become less risky. For example, that 1% developer’s professional twin might get 0.25% after a year or two. Then, there’s some case-by-case tweaking for competitive situations, salary trade-offs, the company’s need for that particular skill, or other circumstances, but this is a typical starting spot.

But, how should founders divide things up in the very beginning, where none of these internal reference points exist? And, how can founders talk about percentages before any funding? Five percent might feel fair in a particular situation for a near-founder post-funding, but how much is that pre-funding, with unknown dilution?

To crack this, I usually advise teams to negotiate relative ownership and to use a “bucket model” suggested by Ted Dintersmith.

First, founders can agree on ownership ratios among themselves, completely isolating unknown, future dilution.  For example, if four co-founders agree to equal equity, they each own 25% at the very outset. After funding and granting stock to other employees, they will all dilute, but their ownership will remain equal. Or, if the co-founders decide the CEO founder should have 50% more stock, that means she has 3 stock units and everyone else has 2. There are 3+2+2+2 = 9 units (shares) total, so the CEO has 33% and the other founders have 2/9 = 22% each.

Second, to figure out relatively fair ratios, consider simple “buckets” for how each founder and early employee’s contribution (past and future). The basic bucket is “contributing to the company full time until it’s successful”, perhaps with different levels. Another might be “credit for prior work”, for meaningful time invested before the rest of the team joined. There might buckets for special roles (e.g. CEO), a unique personal brand, recruiting ability, experience, network/relationships, domain expertise, or other special circumstances.

It’s easy to make this overly complicated, but it doesn’t have to be. Consider an example: Alice has been working for a year on NewCo, before recruiting Bob (the founding CEO), Claire (less experienced) and Daniel (a professor & well-known subject expert). Alice, Claire and Bob will work full time, and Daniel will consult part time, work summers, and possibly take a sabbatical. Alice might get 2 units for prior work plus 4 units for contributing full time. Bob gets 1 for being CEO + 4 for full time. Claire might get 3, and Daniel gets 2 (one for being an expert and another for committing ~20% of his time).

With a total of 16 units, the initial ownership (pre-funding) is:

Alice 6 / 16 = 37.5%
Bob 5 / 15 = 31.25%
Claire 3 / 16 = 18.75%
Daniel 2 / 16 = 12.50%

If we allocate (say) 15% for future hires and 40% to investors for the first round (or rounds), that means founders are splitting the remaining 45% of the company, per their agreed-to relative ownership. Post-funding, the founder’s ownership is:

Alice 16.9%
Bob 14%
Claire 8.4%
Daniel 5.6%

Also, founders should absolutely implement some form of vesting. Founder vesting is a “start-up prenuptial agreement”: it defines what happens with equity should someone leave the company. It’s often very unfair to remaining founders if a departing co-founder keeps all of his original equity. Alternatively, if founders don’t implement vesting, early investor(s) will likely require it for funding.

Equity discussions among founders can be delicate, intense, & emotional, and having some rationale can often defuse some of the emotional aspects. I hope this framework is helpful!

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