Dividing Founders Equity
There’s plenty of advice about dividing equity for startup founders. There are even calculators online that do it for you.
This post isn’t about how to divide equity. It’s about coming to terms with the decision.
No matter what, discuss.
It’s often said that running a business is like running a marathon. If you start running with a grain of sand in your shoe you’ll end the race with a blister.
Important decisions are like grains of sand. If you don’t discuss them they will cause blisters. Founders tend to avoid discussions and hope decisions will be resolved by time. This is especially true at the start. Early founders don’t want to do anything to disrupt their momentum or ruin their dynamic.
There’s no incorrect way to divide equity. You can agree to use any method you want. Sometimes it’s even obvious how the equity should be divided. But agreement isn’t the same as alignment. No matter what - even if you use a third-party tool or arbitrator - it’s important to discuss founders equity.
- Does everyone understand the how the equity was divided?
- Does everyone agree with the inputs that lead to the decisions?
- Did the shy founder say everything they need to say?
- Did the distracted founder forget to mention their hidden talent?
- Is everyone aware of their shortcomings?
- What is the opportunity cost if you lost a founder? Can they be replaced?
These are hard things to talk about, but if left unanswered will cause resentment. The things that aren’t discussed are grains of sand in your shoe. Make sure that you remove them before you start running.
Metaphor can help to remove ego from the decision. For example:
Imagine a restaurant is looking for a new manager. There are 2 applicants:
- One has been working for 7 years in a successful property group. Managing teams, working in sales. He has a great network within the property industry and is extremely hard working.
- One has been in hospitality for 10 years. She has spent that time learning skills that will make her great at running restaurants, from flipping burgers to running her own cafe.
- Whose skillset is most tailored to running the restaurant?
- Who would you give the job to?
- There are known-unknown in running a restaurant, and unknown-unknowns. Which person has the least unknowns?
- If the two were to start a restaurant together, how would you suggest they split the equity?
Seems pretty obvious right? OK, now pretend the job is for a property company instead of a restaurant and go through the questions above.
See how all the answers have changed?
The company matters as much as the people. This exercise is a great way be objective. Creating personas helps to extract the relevant skills each founder is brings. Positioning the founder roles as jobs forces you to “hire” yourself.
Finally, here are a few cognitive biases that can prevent founders from reaching alignment
- Anchors. If at some point a founder was told that they should get X%, they probably won’t move far from that number (anchors work both ways - sometimes founders will be anchored low)
- The Lake Wobegon Effect. People tend to overestimate their abilities. This is particularly true of first time founders, since they have a lot of unknown-unknowns. They don’t know which skills they are lacking so it’s very difficult for them to assess their level of competence