I think this explains very well why in my situation with my co-founder, I don't feel like anything but 50/50 would work, but yet I still agree that such a split is inherently risky.
While my co-founder and I have the benefit of knowing each other well and working together for twelve years, the strength of that relationship would make it impossible for one of us to have an overruling power.
We do have sectional overrules, however, where as "CEO" I have certain areas that are "mine", and as "CTO" there are areas that are up to him. But neither of us can overrule on the bigger questions like selling, shutting down, moving to the Bay Area, etc. It's not the 50/50 that prevents that, it's the pre-existing relationship. No differing equity split would remove the damage that unilateralism would cause.
So I don't think we ever had an option on how to split. But that's not the same for everybody.
I wouldn't start a company with someone where the relationship wasn't based on fairness. If I don't trust my potential co-founders enough to share the company equally, they shouldn't be my co-founders.
EDIT: s/your/my/, s/you/I/ ... my personal position may not be best for you.
Your apparently definition of 'fair' is '50/50'. I have a different one: You share it according to what you bring to the table.
If you really are bringing the same value to the company, then 50/50 is correct. In reality, that's not likely to be the case.
The CEO needs to be the guy that holds it all together. That's a lot of responsibility, and requires some serious knowledge/education/experience/talent/etc. As much as I like to think the developer is the lynchpin in the company, it's actually the CEO. A bad CEO will destroy a company faster than a bad developer. And a bad developer is easier to replace.
As the article says, the split will depend on the people involved. There's no magic formula for figuring it out.
A key point made that's relevant to a many other parts of a startup is this: It depends.
People want simple answers to questions that are actually complex. In this case, it's not that it's incredibly complex but that there is no ONE right answer (50/50 or not 50/50). (At least, this is my humble first-time-entrepreneur take on the matter.)
Furthermore, everyone has their own bias and point to their own anecdotal situations as proof that either 1) they are right or 2) the other person is wrong. And yet they don't realize that that both cases can be true (that is, their solution was right for their situation and the other persons solution would've been wrong for their solution but right for someone else's).
In my case, 50/50 (or even split) would've made sense early one when I first started. And this is what I was aiming for. But, as time went on, it became apparent that I would be leading this startup by myself. As time went on, 50/50 just made no sense since I was putting all my time/effort/ideas into the project, full-time.
These days, I would never accept 50/50 even if that other person is a friend (mind you, I've been working on my startup for over a year and have a live product and users). Fairness, in my case, isn't about 50/50 but giving a fair share.
I think the author conflates fairness with equality and inequality with self interest.
You can be fair but unequal and unfair but equal. Also, just because you might be getting the smaller share of an unequal deal does not mean you aren't still serving your self interest.
The purpose of a 50/50 split is effectively to convey the following point: "We could argue about this and come up with some percentage split, but actually, the most important thing isn't for the percentage to be accurate, but for it to make both of us feel like we've been treated fairly and equally." It sets the tone for the rest of the "adventure". "We're in this together, whatever happens!" is the core message.
This is important when the relationship between the founders is, in a way, irrational, based on unconditional friendship, and that relationship is being transferred into the business context.
The purpose of an unequal split is to fairly (!) represent the different contributions to the business. "I'm bringing in all those things, and you're bringing in these things, and so I deserve 70% of the business and you deserve 30%." It also sets the tone for the future. "We'll each get the part we deserve" is the core message.
In the equal split context, it's unlikely that either founder will walk out unexpectedly, so long as they both entered into this with their eyes opened. With the unequal split, I believe it's a lot more likely - if it ends up not being in the self-interest of one of the founders.
Having the larger share doesn't mean that you won't walk out, either. I was in a 70/30 split in my first startup, and I had the smaller share... and my cofounder effectively walked out of the business! I was shocked, because I thought that we were in it together, but it made sense from my cofounder's point of view because the business wasn't making enough money to be worth his time, so it was not in his self-interest to continue it.
A good example you can cite is Bill Gates and Paul Allen. Despite both making billions, the recent publication of Paul Allen's autobiography shows how equity impacted their relationship and friendship (and still does to this day). Whether Microsoft would have had the same success if they had been 50/50 is another question.
Thanks for writing this. I know of several people who have been trying to vocalize their support for 50/50, and you nailed it with self-interest vs. fairness. Ultimately, the decision should be made in the company's best interest, and not either of the co-founders, resulting in the best long-term results for everyone.
Paradoxically, if one's self-interest is not aligned with that of the other cofounders closely enough that the potential long-term benefits of an even equity split (e.g. flexibility to pivot without redistributing equity and building the sort of consensus based decision making process required to maintain founder control following significant outside investment) outweigh the short-term personal benefit, then an uneven split is more likely to move those self-interests further apart rather than to align them more closely. In other words, if your self-interest isn't best served by your cofounder's success then why have a cofounder?
We had a slightly different approach to solve this problem of fairness vs. (encouraging) self-interest:
Anyone who contributes and sticks with the project till the end, has a stake equal to number of hours put in multiplied by number of users/sales that resulted in (divided by everyone's hours of course). Anyone who contributes but doesnt stick till the end i.e. raising capital, doesnt get a stake but gets compensated at twice the market rate for that skill (when we raise capital).
I think it depends a lot on what it is that you want your company to be and how many people you're talking about. Also, there is a difference between wanting equity for control or equity for getting a share of the profits.
With 2 people: I think either you have a 50/50 split or you might as well have 99/1 or even 100/0. Anything more than 50/50 means one person has effectively total control. Thus, why pretend it's anything other than a dictatorship in that instance? If you both want control, you need 50/50.
If it is about making money, then in place of an equity stake, you can have a revenue sharing agreement that would provide a % of revenue or profits or even a % of whatever the company would get bought out for. The amount each person gets in that instance could vary a lot more based on contribution or whatever "fairness factors" made the most sense to both parties.
The point is, control and profit sharing are two separate issues that often get lumped into the equity discussion when they don't have to.
With 3+ people, I think the same rules tend to apply. I think for sake of simplicity it makes the most sense for smaller (non-VC backed companies) to split equity evenly among the founders or have a single person who has 100% control. Then, do revenue/profit sharing amongst everyone as is deemed "fair".
If you are VC backed, well that's a different ballgame all together.
This is incorrect. Shareholder votes are only one control provision; board seats are another. If you both have board seats, your cofounder has an effective veto on major transactions.
Don't get clever with "revenue sharing agreements" etc. You want to innovate in your core business, not in financial instruments. The alternative is a world of unintended legal and tax consequences.
[+] [-] wolfrom|15 years ago|reply
While my co-founder and I have the benefit of knowing each other well and working together for twelve years, the strength of that relationship would make it impossible for one of us to have an overruling power.
We do have sectional overrules, however, where as "CEO" I have certain areas that are "mine", and as "CTO" there are areas that are up to him. But neither of us can overrule on the bigger questions like selling, shutting down, moving to the Bay Area, etc. It's not the 50/50 that prevents that, it's the pre-existing relationship. No differing equity split would remove the damage that unilateralism would cause.
So I don't think we ever had an option on how to split. But that's not the same for everybody.
[+] [-] ivey|15 years ago|reply
EDIT: s/your/my/, s/you/I/ ... my personal position may not be best for you.
[+] [-] wccrawford|15 years ago|reply
If you really are bringing the same value to the company, then 50/50 is correct. In reality, that's not likely to be the case.
The CEO needs to be the guy that holds it all together. That's a lot of responsibility, and requires some serious knowledge/education/experience/talent/etc. As much as I like to think the developer is the lynchpin in the company, it's actually the CEO. A bad CEO will destroy a company faster than a bad developer. And a bad developer is easier to replace.
As the article says, the split will depend on the people involved. There's no magic formula for figuring it out.
[+] [-] freshfunk|15 years ago|reply
People want simple answers to questions that are actually complex. In this case, it's not that it's incredibly complex but that there is no ONE right answer (50/50 or not 50/50). (At least, this is my humble first-time-entrepreneur take on the matter.)
Furthermore, everyone has their own bias and point to their own anecdotal situations as proof that either 1) they are right or 2) the other person is wrong. And yet they don't realize that that both cases can be true (that is, their solution was right for their situation and the other persons solution would've been wrong for their solution but right for someone else's).
In my case, 50/50 (or even split) would've made sense early one when I first started. And this is what I was aiming for. But, as time went on, it became apparent that I would be leading this startup by myself. As time went on, 50/50 just made no sense since I was putting all my time/effort/ideas into the project, full-time.
These days, I would never accept 50/50 even if that other person is a friend (mind you, I've been working on my startup for over a year and have a live product and users). Fairness, in my case, isn't about 50/50 but giving a fair share.
[+] [-] ansy|15 years ago|reply
You can be fair but unequal and unfair but equal. Also, just because you might be getting the smaller share of an unequal deal does not mean you aren't still serving your self interest.
[+] [-] swombat|15 years ago|reply
The purpose of a 50/50 split is effectively to convey the following point: "We could argue about this and come up with some percentage split, but actually, the most important thing isn't for the percentage to be accurate, but for it to make both of us feel like we've been treated fairly and equally." It sets the tone for the rest of the "adventure". "We're in this together, whatever happens!" is the core message.
This is important when the relationship between the founders is, in a way, irrational, based on unconditional friendship, and that relationship is being transferred into the business context.
The purpose of an unequal split is to fairly (!) represent the different contributions to the business. "I'm bringing in all those things, and you're bringing in these things, and so I deserve 70% of the business and you deserve 30%." It also sets the tone for the future. "We'll each get the part we deserve" is the core message.
In the equal split context, it's unlikely that either founder will walk out unexpectedly, so long as they both entered into this with their eyes opened. With the unequal split, I believe it's a lot more likely - if it ends up not being in the self-interest of one of the founders.
Having the larger share doesn't mean that you won't walk out, either. I was in a 70/30 split in my first startup, and I had the smaller share... and my cofounder effectively walked out of the business! I was shocked, because I thought that we were in it together, but it made sense from my cofounder's point of view because the business wasn't making enough money to be worth his time, so it was not in his self-interest to continue it.
[+] [-] aaronf|15 years ago|reply
Thanks for writing this. I know of several people who have been trying to vocalize their support for 50/50, and you nailed it with self-interest vs. fairness. Ultimately, the decision should be made in the company's best interest, and not either of the co-founders, resulting in the best long-term results for everyone.
[+] [-] brudgers|15 years ago|reply
[+] [-] everlost|15 years ago|reply
Anyone who contributes and sticks with the project till the end, has a stake equal to number of hours put in multiplied by number of users/sales that resulted in (divided by everyone's hours of course). Anyone who contributes but doesnt stick till the end i.e. raising capital, doesnt get a stake but gets compensated at twice the market rate for that skill (when we raise capital).
[+] [-] programminggeek|15 years ago|reply
With 2 people: I think either you have a 50/50 split or you might as well have 99/1 or even 100/0. Anything more than 50/50 means one person has effectively total control. Thus, why pretend it's anything other than a dictatorship in that instance? If you both want control, you need 50/50.
If it is about making money, then in place of an equity stake, you can have a revenue sharing agreement that would provide a % of revenue or profits or even a % of whatever the company would get bought out for. The amount each person gets in that instance could vary a lot more based on contribution or whatever "fairness factors" made the most sense to both parties.
The point is, control and profit sharing are two separate issues that often get lumped into the equity discussion when they don't have to.
With 3+ people, I think the same rules tend to apply. I think for sake of simplicity it makes the most sense for smaller (non-VC backed companies) to split equity evenly among the founders or have a single person who has 100% control. Then, do revenue/profit sharing amongst everyone as is deemed "fair".
If you are VC backed, well that's a different ballgame all together.
[+] [-] danshapiro|15 years ago|reply
Don't get clever with "revenue sharing agreements" etc. You want to innovate in your core business, not in financial instruments. The alternative is a world of unintended legal and tax consequences.
[+] [-] suking|15 years ago|reply
[+] [-] unknown|15 years ago|reply
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