Ask HN: Co-founder equity split methods?

Assume your friend does no more than a day a week, and in 5 years you’re worth a huge sum on money - what percentage do you think would fairly reflect his reward, that’s the percentage you should give now.

If you give 5% for example, there’s no reason you can’t give more in time based on increased input, but don’t give something you’ll regret in the future.

There's a tale I recall of 3 hobos who pooled their funds so they could jointly buy a loaf of bread. They too faced this dilemma until one of them pointed out that the purchase was only possible because all 3 contributed.

This is just me, but my personal policy is that all splits like this have to be equal. With two people, 50-50. If one person isn't contributing (or expected to contribute) enough to make that acceptable, that person shouldn't be a partner.

The reason for this policy is that I've seen far too many companies go under because partners start fighting about things like who contributed more and so deserves the larger share. That's utter poison to a partnership (particularly if a partner is a friend, which is a whole danger zone all by itself) and business.

Better just to say "we split everything equally" to avoid fights in the future when circumstances change.

I am not suggesting this is the best way to handle it. It's just the way that I've arrived at, and it's worked very well for me for decades.

Never, ever give equity to a part-timer.

My two cents:

- The equity split is about incentivizing/rewarding you both for the work ahead, which is going to be much harder than anything thus far

- I would treat the 2 years as a sunk cost

- If you are true cofounders, 50/50 or 51/49 is the fair way to go

- Vesting diffuses the edge cases (either of you leave early, either of you turn out to be flakes), and is a necessity if you want to ever raise VC money

- It sounds like there is a question of him working only part time. In this case he should not get founder equity. Read the clerky docs as there can be severe drawbacks of granting significant amounts of equity post-founding

Some quick notes:

- it doesn't matter how much time you spent on it, look forward

- incorporate first, very cheap

- you will have to set up a vesting schedule for yourself

- you can use a calculator like this to inform you of the roles you'll have in the future https://foundrs.com/ (number doesn't matter, but look at the questions)

- you will have to set up a vesting schedule for him

- if you can acquire the hardware IP for the company, just do that (you will have to raise to do this - don't spend own money - but it will be hard without the IP in the first place, so maybe precommit to price)

- I have no faith in part-time founders. Among my network of people running venture-funded startups, 100% worked full-time on it from incorporation. People worked part-time, but you were either in at incorporation or not.

- in practice, what you have to give away in equity is replacement-cost

- in practice, you currently have a company worth 0 and every person you bring on should change the EV up.

- you can hire this person as an employee and then provide equity commensurate and then issue more for when they come on full time

Sorry, not entirely useful but hope what's there helps.

If your friend's time commitment will depend on how things go (and presumably your startup's ability to replace income he currently earns working the rest of the week) and you regard yourself as having done most of the work so far and expect this to continue in the near future, it sounds like the actual relationship you are both looking for is closer to paid contractor than cofounder

Based on my experience it’s highly dependent on the situation and especially on the personalities involved. One of the strongest human emotions is the resentment people can feel when they perceive a deal as being unfair. So if you can come up with an arrangement that you both honestly feel is fair then that is ideal, and maybe that is a 50:50 split or maybe not, that has to be assessed on what you both think is the value of your contributions today.

I’ve had a 50/50 split that worked beautifully because we complemented each other in our roles, we were committed and there was trust (so even if the workload wasn’t always equal it didn’t create any resentment.)

But I look on that as the rare ideal exception, I think giving a 50 split to someone not willing to commit is a formula for possible future problems.

IMO someone who isn't willing or able to work on the effort full time cannot be a co-founder and equal partner. If your friend wants to start off as a part time employee or consultant then they should be given equity accordingly. Later if/when they want to increase their role in the company you can always give them additional grants.

Being equal partners with someone but contributing five times as much work into the company as them is a recipe for disaster. You may not care all that much right now, but what about when you need to bring on an outside investor and dilute your own stake?

Remember-- 50% of 0 is 0. Your initial founders should have a vested interest in the success of the company. If you believe someone is important enough to bring in at this very early stage, then no I don't think 10% is enough even if they're part time.

70/30 seems reasonable based on what you described.

Just plan out the time and reflect it in the grants and vesting schedule. Like, you get low x% grant for the first year because part-time, then after that first year, you become full time with another grant (with vesting, of course) that will top you up to 50%, or we part ways. Doesn't sound difficult to implement? It also sets the borders and timeline for commitment so that the person doesn't just linger around undecided.

As to whether or not go all the way to 50% in total... kind of a different question... Obviously better for you to keep as much as you can in the pool and not give away, not even out of greed but to keep the options in the pool to afford more star hires in the future, for example. But it might create bad blood if the person really comes through and starts contributing.

There’s a pretty good article on Ycombinator about this. They recommend 50/50 splits. Basically, they say that most of the work is ahead of you.

https://www.ycombinator.com/library/5x-how-to-split-equity-a...

Now if your friend can’t commit right away, another option is to just buy their work and find another cofounder who is ready to go. Maybe something like 5% or 5k in 5 years, whichever is bigger. That’s just me spitballing though.

How confident are you that your friend will quit their job to work full time on your startup when you start having a moderate (but not huge) amount of success? Will you get there with your friend only giving 1d/week?

If your friend can’t work fulltime on your startup it might be worth hiring them as an employee or contractor with some equity comp to match their commitment to the startup.

If you do go with vesting you may need to set up vesting for yourself to show good faith. But since you’ve already made some progress and are working fulltime on it, it might make sense to agree with your friend on different initial amounts of equity and/or different vesting rates. You may need to ask a professional to figure out how to structure it. I feel like an optimally fair way would be to have your half be structured as vesting over 4y but with you starting with some equity proportionate to the current work you’ve put in, then have your friend’s half vest at a rate conditioned on how much time they can give at any given time such that at fulltime commitment it would vest in 4y (but the so the vesting rate would change if they quit their day job to work on the startup fulltime).

Honestly if I were in your position though I would start with having your friend contract and then bring them in as a founder later if they’re ready to do it fulltime. A lot of people like the idea of working on something like this but lose interest when faced with the reality of grunge work, no immediate success, etc.

Bring him on as a founding employee with equity assigned to him as per the amount of time he's working on the product, relative to the amount of time you're working. Eventually, when you're seeing traction with your product, advise him to join you full time on equal equity terms.

This can easily be handled by using Slicing Pie - it contemplates all of these scenarios fairly https://slicingpie.com/

You can pair it with something like https://mardukmethod.com to do all the tracking and set up the business.

the answer is: vesting

You can apply something like this to do-founders if you can figure out your relative market value and how much cash/work each person needs/contributes.

https://blog.ivanbercovich.com/2022/startup-compensation

Keep in mind the HN crowd is attuned to VC methods of equity splits, and thus will recommend them out of familiarity rather than proper evaluation of fairness.

> I've read a book called "Slicing Pie handbook", but it seems to me it requires a lot overhead to get it right.

Part of business IS bookkeeping. But I've found Slicing Pie to be fair in that it takes into account hours worked, hourly rates (and experience), and risk (already) put in, and it implicitly adjusts over time. If you can't be arsed to keep records, you might not be suited to run a business with people in it.

To begin minimally with slicing pie, start keeping track of hours/pay in a spreadsheet - it really doesn't take much. Then refer to the book for scenarios like people leaving, 'baking the pie'.

For point 2 of why: you don't need a co-founder you need an advisor.

For point 1, it doesn't matter what they match skill wise if they are not putting in time.

You are better off as a strategic partnerships in separate startups.

i recommend going through yc's startupschool.org, they have modules that talk about cofounder criteria. on equity split there is yc investor school on youtube.

You didn't give us enough information to answer this question well.

1. Like why can he only commit 1 full day per week, is it money, a bad time, he wants to see how the startup turns out before committing?

2. Do you have money to pay him?

3. Do you need him?

Situations you do want to be in.

1. Make him an insulting offer that sours your friendship

2. Company dies due to founder deadlock

3. Having a silent partner who didn't commit like you did

4. Be unable to raise money because he has 50% equity and isn't committed. Investors don't want to invest in a company a founder doesn't believe in enough to quit their job, and they don't want to invest in a company where 50% of equity is tied up.

Some general advice

1. Make sure he vests

2. If you give him 50/50 make sure there is a shotgun clause

3. Set a timelimit on when he has to join full time. (something like he needs to come work on the project full time with 365 days, and his vesting starts then. If he never makes the jump he doesn't get the equity. Basically he's working for the option to come on board if things work out)

4. I'd offer him the 50/50 split to quit his job and come work with you full time so he knows you value him as a partner.

5. I definitely would not give someone 50% of my company to work on it part time unless I absolute had to.

I've heard of situations where founders issue a large pool of shares owned by the corporation itself and bill hours to the company, receiving a fair payout of their target share price in dollars as one share, and each founder can put in as much work as they have time to invest. I don't recommend this, but it's something I saw a couple guys do when they both had fluctuating free time to commit.