Lesson #139: HOW EXACTLY TO Calculate Equity Split Between Founders In Startups

The other day, I got asked a question about how best to divide up the equity stake in a new startup, between the founders. I informed him that was a very big question, with a lot of variables that go into to calculating a fair equity split. So, it inspired me to create this post on this issue, to document my answer for everyone.

In my estimation, there should be a huge premium placed on being the originator of the idea. With all the things equal, which means that a 50/50 split between two co-founders, could be 66/33 predicated on the premium for coming up with the original idea and for starting the original development efforts and sourcing the original team. If people are funding the business, they should get a premium, your day because at the end of, cash financing founders are acting different than a seed-stage buyer no. Which means a 50/50 split, with all other things equal, would need to be adjusted for the money investment.

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100,000 in seed capital, that may be worth 20% of a seed stage company’s valuation. So, a good divide would be nearer to 60/40 in favor of the funding founder, when diluted for the cash. Key professionals should get a premium steak over non-key professionals. So, a CTO or CEO would get a much higher stake than an office supervisor or a visual developer, for example. So, in this full case, I’d take your total ownership and separate it up by worker tiers.

Maybe, something like 10% each for five C-level professionals; 2.5% each for 10 VP level professionals and 1% each for 25 director/manager level personnel (adding up to a total of 100%, with all other things being equivalent). Understand that not all of this will be granted day one, with everyone having higher stakes in the short run, nevertheless, you shall come with a collateral cushion to try out with as the worker base scales. People who are not taking a salary, should get reduced stake also.

To me, that is no unique of financing the business. 100, per year salary 000, this is similar to a 20% stake in a brand-new startup. So, with all the things equal, a 50/50 break up would be nearer to a 60/40 divide, with the same reasoning and calculation we used in the cash buyer example. And, please notice, I kept saying “with all others things equal” in each paragraph. You need to take all four paragraphs under consideration collectively, in calculating a fair equity split between the founders.

And, keep in mind, there may be additional considerations to take into consideration, like contributing patents, sourcing investors or other value to the startup. So, make sure to take a holistic view of what a founder is getting to the table, across the board. But, breaking up the pie is half of the exercise. 124 on Vesting of Founder’s Stock. So, in the event the founders split ways, there are mechanisms in place to get any unearned equity back into the hands of the company.