Home ➾ Blog ➾ Business & Startups ➾ Dividing shares in a startup, 50/50 or something else?

Dividing shares among the team is often a difficult, complicated and tense process. At times like these, it’s extra good to remember that the collaboration is for the long term and that it is ultimately about growing the pie together.

As a starting entrepreneur you can’t yet rely on previous experiences. Despite the fact that a large part of entrepreneurship consits of making mistakes and learning from them as quickly as possible, you want to avoid a big mistake in this area.

It can literally mean the end of your startup and collaboration.

In short, learning from predecessors!

As such, over the past years I’ve consumed a fair amount of content in the field of equity splits, and divided the pie twice before with earlier co-founders.

In this blog post, let’s look at how startup accelerator Y Combinator and renowned books like The Founder’s Dilemmas and Slicing Pie look at this subject.

The purpose of this blog post specifically is to take stock of the various ideas in the field of equity splits and to weigh them up against each other. Think of it as an overview.

1. Y Combinator:
(Almost) equal equity splitting

Anyone who has studied the world of lean and startups has probably come across something from Y Combinator; either a blog, article, webinar or YouTube video.

This American – Silicon Valley based – accelerator has basically become the authority many founders look to for advice. Which is not surprising as, since its founding in 2005, it has helped many startups get funded by venture capital firms, including well-known companies like Dropbox, Twitch, Stripe, Weebly, Reddit and Airbnb.

Y Combinator has collected a library of knowledge on its website to help founders with questions they have about startup-related topics, including of course the answer to the question of how to divide shares among the co-founders.

Position: Shares should be divided equally, because all the work is in front of you.

What percentage of shares should the co-founders receive?

Michael Seibel, fulltime partner of Y Combinator and CEO of the YC Startup Accelerator, wrote a very strong and compact essay on why he believes that almost all startups should divide shares equally. His blog and the connected video are so compact that I might as well share it below: 

“When I search the web on this topic I often see horrible advice, typically advocating for significant inequality among different founding team members. We see this trend reflected in the thousands of applications we review at Y Combinator every year.

Here are some of the most often cited reasons for unequal equity splits:

∎ “I came up with the idea for the company.”
∎ “I started working x months before my co-founder.”
∎ “This is what we agreed to.”
∎ “My co-founder took a salary for x months and I didn’t…”
∎ “I started working full time x months before my co-founder.”
∎ “I am older / more experienced than my co-founder.”
∎ “I brought on my co-founder after raising x thousands of dollars…”
∎ “I brought on my co-founder after launching my MVP.”
∎ “We need someone to tie-break in the case of founder arguments…”

Founders tend to make the mistake of splitting equity based on early work.

All of these lines of reasoning screw up in four fundamental ways:

(1) It takes 7 to 10 years to build a company of great value. Small variations in year one do not justify massively different founder equity splits in year 2 – 10.

(2) More equity = more motivation. Almost all startups fail. The more motivated the founders, the higher the chance of success. Getting a large piece of the equity pie is worth nothing if the lack of motivation on your founding team leads to failure.

(3) If you don’t value your co-founders, neither will anyone else. Investors look at founder equity split as a cue on how the CEO values his/her co-founders. If you only give a co-founder 10% or 1%, others will either think they aren’t very good or aren’t going to be very impactful in your business. The quality of the team is often one of the top reasons why an investor will or won’t invest. Why communicate to investors that you have a team that you don’t highly value?

(4) Startups are about execution, not about ideas. Dramatically unequal founder equity splits often give undue preference to the co-founder who initially came up with the idea for the startup, as opposed to the small group founders who got the product to market and generated the initial traction.

Equity should be split equally because all the work is ahead of you.

My advice for splitting equity is probably controversial, but it’s what we have done for all of my startups, and what we almost always recommend at YC: equal equity splits among co-founders. [1] These are the people you are going to war with. You will spend more time with these people than you will with most family members. These are the people who will help you decide the most important questions in your company. Finally, these are the people you will celebrate with when you succeed.

I believe equal or close to equal equity splits among founding teams should become standard. If you aren’t willing to give your partner an equal share, then perhaps you are choosing the wrong partner.”

by Michael Seibel

2. The Founder’s Dilemmas:
Well thought out and dynamic

A highly recommended book for founders is The Founder’s Dilemmas, Anticipating and Avoiding the Pitfalls that can Sink a Startup, written by Noam Wasserman.

In his book, Noam picks up several dilemmas that founders may have to deal with. It is the result of more than ten years of research in which he has worked with hundreds of founders and future founders, and analysed data from nearly 10,000 founders in the technology and human sciences industries.

So, he has also developed a vision on the split of shares; how, when and under what condition.

Position: Shares must be divided in a well-considered, dynamic way that allows for an uneven split. And do not split shares too early.

When is the best time to divide the shares?

Splitting the pie too early can make it necessary to renegotiate over and over; an emotional activity that can put a lot of strain on the relationship between founders.

Especially in the first months, when the structure and composition of the team is still constantly changing, it is best to postpone the split. This gives the founders a chance to see what everyone’s contribution really is; there is always more to learn about the company and everyone’s input.

When things start to get more solid and there is more clarity about the long-term contributions of each founder, an attempt can be made to split the equity.

Oh, and preferably choose a moment before the interests increase, because the calmer the moment, the calmer the conversation.

Sub-position: Do not split the shares yet when the structure and composition of the team is still in constant flux.

The founders can vary about when they want to split the shares

Think about it. For founders whose biggest contributions are in the earlier stage of the startup, such as the founder who came up with the idea or the one who invested the most seed capital, would want to split sooner than someone whose unique contributions come later, such as a technical founder.

The same goes for co-founders who are a bit younger and have less experience than the other partners, but are confident in their skills. Postponing the distribution can be positive for them.

Static vs. dynamic equity split

Equity splits are still almost always done equially. Sometimes they come with a dynamic element, such as vesting, but still static in the core; 50 / 50, of 51 / 49, of 25 / 25 / 25 / 25, etc..

In a startup, early plans often change drastically. It sometimes happens that a pivot has to be made. What happens then? What if the contribution of one co-founder is more valuable than expected and the contribution of the other is less? What if even the most well-intended co-founder leaves?

No matter how important it is to get an initial split right, it is equally important to keep the split right; that is, to be able to adjust the split as circumstances change.

Sub-position: The first split must be accompanied by a dynamic element.

A fast split vs. a well thought through

The easiest route – and one that is taken very often – is to choose an equal and static split. This avoids difficult conversations and is the easiest for all parties in the short term.

This often causes problems in the long term.

In addition, Noam’s research showed that teams that had made a quick equal split received considerably lower valuations than teams that had made a well-considered equal split or unequal split.

Venture capitalists see a difference between teams that engage in a serious dalogue about the split and teams that avoid such a discussion and realy on a quick handshake. The second is often a symptom of weakness of a founding team.

Sub-position: Do not opt for a quick split. This contributes to lower valuations and causes problems in the long run.

Equal vs. unequal equity split

It is unlikely that two co-founders will each contribute exactly the same amount of value, have the same opportunity costs, run the same risk, and have the same motivation. In case of large differences, an equal split will most likely be a breaking element in founding teams in the long run.

From his research, Noam came up with a number of key factors that should influence equity splits. However, these factors deserve further research and careful attention from founding teams.

Core factors for dividing equity shares

By working together as a team to develop the template on which the share dividing will be based, founders can shift the focus from arguing over specific numbers to a more productive process of arriving at criteria, weighing them, and negotiating about tasks and responsibilities.

Below is a copy of figure 6.3 from the book The Founder’s Dilemmas:

(1) Past Contributions:
How much has the founder contributed to building the value of the startup so far?

(a) Idea Premium:
Founders who contribute the original idea on which the startup is based have made a unique contribution to the venture.

(b) Capital Contribution:
Founders who have made larger contributions to the startup’s seed capital should see a proportionate increase in their equity ownership.

(2) Opportunity Cost:
What are the founders sacrificing in order to pursue the startup?

(3) Future Contributions:
Most of the work required for the startup to be successful will come in the future, but these contributions can be hard to anticipate. How much can each founder be expected to contribute to the value of the startup down the road?

(a) Serial Founders:
Members of the founding team who have previously led a startup to a succesful exit can be expected to contribute more human and social capital down the road.

(b) Level of Commitment:
Founders who are committed full-time to the venture can be expected to contribute more value.

(c) Titles:
The official positions of the members of the founding team have been shown to influence equity splits, with CEOs receiving a substantial equity premium.

(4) Founder Motivations and Preferences

(a) Wealth Motivations should lead founders to prioritize larger equity stakes.

(b) Risk Aversion and Optimism will affect how much priority a founder places on gaining equity versus cash compensation.

(c) Tolerance for Conflict will affect a founder’s willingness to engage in negotiations.

(d) Prior Relationships can affect expectations about equity splits.

Set the agreement in writing

In order to prevent later misunderstandings or miscommunication, it is important to record the agreements made in writing.

The common source of tension; the “he said / she said” discussion, can easily be avoided by creating well-documented, clear written agreements.

3. Slicing Pie:
Dynamic fairer than static

Mike Moyer, author of Slicing Pie and Slicing Pie Handbook, also believes in the fairest equity splits possible. In his book he promises that founders with his way may not always get what they want, but they do get what is fair and they deserve.

“If everyone feels they are getting what they deserve, everyone can get along and help the company move forward as a team.”

His approach differs from those mentioned so far; it’s extremely dynamic.

By the way, Noam Wasserman, author of The Founder’s Dilemmas, wrote the foreword in Mike’s second book on the topic: Slicing Pie Handbook. Noam seems to be very enthusiastic about what Mike has developed.

Position: A person’s share of the reward must always be equal to that person’s share of what is at stake to achieve the reward.

Dividing shares at the beginning: Recipe for disaster

As said in The Founder’s Dilemmas, dividing shares at the beginning of a startup almost always causes friction in the team. Startups find themselves in a rapidly changing situation.

It is impossible to estimate what will happen in the future and how this will affect the original split. The relationships between founders will suffer from renegotiations.

Waiting with the equity split: Recipe for disaster

Waiting with the split until the moment there is something to actually divide, might be an even worse idea.

Everyone always sees his own contribution as more valuable than the contribution of someone else. Expectations probably vary widely. In addition, the founders have had to wait all this time. They haven’t eaten anything yet. They are hungry. The expectation on reward has taken a life on its own.

Why ‘The Grunt Fund’?

A static split always causes problems in fairness. At least one of the founders will feel used by the other.

That’s why Mike believes founders should opt for a dynamic method of stock distribution. He developed The Grunt Fund; a kind of framed fund in which the contributions of the different parties is kept. It:

∎ rewards participants for the relative value of the ingredients they provide;

∎ gives them the incentive to continue supplying more ingredients;

∎ enables founders to add or subtract participants in a fair way;

∎ is flexible in the face of rapid change.

Grunts and Pie

A Grunt Fund consists of Grunts and Pie.

A startup needs certain ingredients to grow; think of time, ideas, relationships, intellectual property, money, materials, and equipment.

A grunt (fictional creature designed by Mike) is actually another name for someone who contributes something to a startup; think of founders, early employees, investors, etc. However, the problem is: the startup doesn’t yet have the financial capital it needs to pay the grunts. Fortunately, grunts are happy with pie.

Pie is another word for equity; a name that is used a lot in the world of startups. “Grow the pie.” The bigger the pie, the more value a company has. So a slice of the pie is part of the shares.

Shares in proportion to Fair Market Value

All the above mentioned contributions have a certain value. What value that is in relation to shares depends on the factors mentioned below. Basically, it is all about everyone receiving their Fair Market Value.

The Slicing Pie method is therefore extremely dynamic, because the distribution of shares can change continuously with each contribution. The more contribution one has in relation to another, the more shares one receives.

In the overview below, I copied a number of values proposed in the book, just to give you an idea. If you are interested in perhaps using this way of dividing equity, I advise you to buy Slicing Pie and Slicing Pie Handbook and use these two books as a guide, not this blog post.

Of course, the books themselves go much deeper into the Grunt Fund concept and come up with a variety of scenarios and how to deal with them.

How does Slicing Pie work in practice?

In order to illustrate the dynamic element over time, I use the kind of table that is also drawn in the book.

For example: Madi and Klaus start the company Pieslicers together.

In the first quarter, they can both work full-time on the company. They put in the same number of hours and all investments are equal in value. The S in the table below stands for Slices (slices of pie). After the first quarter, they each have 50% of the shares of the company.

The second quarter was slightly different. Where Madi put all her time in the company, Klaus had to do something else for certain reasons.

He couldn’t be there all the time in the second quarter. His contribution in the second quarter was 20 S. The total split so far is 62.5% / 37.5%.

The third and fourth quarter went well. Both founders worked hard on the company and put in the same amount of money and hours.

So, after the first year, the total split results in 55.6% / 44.4%.

4. Which way appeals to you?

Equal or unequal? Static or dynamic? Well thought through or a quick handshake?

As Michael Seibel pointed out, the internet is full of bad advice on this topic. Especially on different forums.

Often someone asks a short question – usually without any context – after which numerous reactions are posted from people who have very strong beliefs, but of whom you don’t know whether these are people you should take advice from.

With this blogpost, I hope to have been able to give you some extra insights from people who have a lot of experience on this subject. If certain elements have caught your interest, I would highly recommend that you do some more research on them.