Startup founders often ask how the typical startup equity is shared with their co-founders and workers. The common idea is that the distribution of shares among the founders of a startup should depend on many factors and thus can be very uneven. This is one of the most harmful tips that put a time bomb under a startup.
Startup Equity Stakes and Co-founders
The most popular reasons for uneven distribution of shares among startup cofounders:
- I came up with an idea for a startup.
- I started working on this startup a few months earlier than my co-founder.
- We agreed on this way with my co-founder.
- I brought in a co-founder after launching MVP.
- I hired a co-founder after fundraising.
- I am older and have more experience than the other co-founder.
According to Michael Seibel, who is the CEO of Y Combinator, the reasons above should be criticized for the following reasons:
- It takes 7 to 10 years to build a great company. Typically, unequal startup equity distribution cannot be excused by small differences in startup performance in the first year.
- The larger the share in the startup capital, the higher the motivation of the co-founders. The vast majority of startups fail. More motivated co-founders lead to higher success chances. There is no profit in acquiring a larger stake in a company that fails due to the lack of motivated founders.
- If you don’t value your co-founders, then other people won’t either. Investors look at the co-founder’s share of a company as an indicator of how much the CEO values his co-founders. If you give other co-founders a way smaller equity stake than yours, investors may think that these co-founders do not contribute to the startup. The quality of the team is one of the top priorities for an investor when deciding whether to invest in a startup. Inequality in cofounder shares can greatly lower this criterion.
- The success of a startup depends on the effective work of the team, not on the idea. There are thousands of great ideas, and only a few have been implemented. It is unfair to give a disproportionate stake in a startup to the initiator of the idea as opposed to other co-founders since only teamwork leads to success.
If you’re building a startup and want to improve its chances of success, you need a motivated team to go into battle with. You will have to communicate with your co-founders probably more often than with your family and they are the ones you will share successes and failures with. Distribute your shares in the startup capital evenly among all co-founders.
If a startup has two co-founders, then in order to avoid a deadlock in critical disagreements, distribute the shares a little unevenly, for example, 50.1% and 49.9%.
To insure against a situation when one of the co-founders leaves the business and at the same time retains a large stake in the company, apply vesting, for instance, for four years. If one of the co-founders leaves a startup or is fired in the first 12 months of work, then he loses his entire share in the capital of the company.
After the first year of operating, the founders are entitled to 25% of their share, and then every month this share increases evenly from the remainder. Thus, fairness is maintained in relation to all co-founders of the company.
Typical Startup Equity Structure example
Moreover, there are studies on typical startup equity structures. For instance, Babak Nivi researched the stakes given to the different professionals hired to the Silicon Valley startup after round A and being paid the wage. Obviously, the numbers can be bigger if the person is highly desired for this role or has excellent track records.
| Chief executive officer (CEO) |
Chief operating officer (COO)
Vice president (VP)
Independent board member
|Lead engineer|| 0.5–1%|
Having a clear understanding of typical startup equity distribution principles we can plan ahead our cooperation with the co-founders, investors, and professionals we hire. Note that employees acquired at early stages usually get larger company stakes than the ones who came later. Make sure your startup maintains the right atmosphere within the team and keeps people motivated.