The most common question we’re asked by new founders is, How do my co-founders and I decide how much equity to take in the company? This is the first of a two-part blog that addresses some common misconceptions about equity split, and how to decide if the equity split between cofounders is not only fair to the cofounders but more importantly, fair to the company. Our takeaway advice always comes down to this: Consider it a successful negotiation if (1) everyone feels fairly compensated in terms of the equity stake they have in the company, and (2) everyone understands what it means to “own equity” in a startup and how that impacts the long-term success of the company.


Why it Matters

Let’s refresh why equity split matters. The first is control. If you own less than 50% of a company’s outstanding shares, all else being equal, you will be unable to control a vote when it is time to vote on important company matters. That’s ok – unless you’re a sole founder, you should be making decisions with your cofounders anyways. Just keep in mind that a large number of decisions require a majority vote. The second reason equity split matters is economics. Many founders have an exit in mind when they agree to work for a startup. In many cases, the bulk of the founders’ compensation consists of equity, so they are rightfully concerned about making their investment of time and effort worth the risk of receiving little cash for their efforts, or possibly never benefitting from an exit of the company.


The Long Game

One of the first things we tell cofounders is to consider the five-year and ten-year plan for the company. If the business model is scalable and the company will enter a phase of rapid growth and then seek to be acquired, then it’s likely that the cofounders are thinking that the higher their percentage ownership in the company, the more money they will make at exit. While this is generally true, many things can chip away at a founder’s ownership stake – outside investment, issuing stock options, and other corporate actions that might dilute stock. In terms of a timeline, founders can expect an exit after several years of establishing a record of profitability, intrinsic value, or both. Many things can happen in those years which might interfere with a founder’s ability to receive the full value of their stock, such as company repurchase rights or a down round. It isn’t possible to anticipate all of the challenges a startup will face, which makes negotiations around equity split difficult.


Dividing the Pie

No matter how many shares are issued by a company to its founders, keep in mind that there are only 100 percentage points to go around. The actual division of equity in the company is impacted by many factors. Did the cofounders hatch the idea for the product at the same time, or did one founder come up with the idea and build it out before deciding he or she needed help? If it’s a case of a single founder seeking to bring on a cofounder, what is the new cofounder’s responsibility and how critical are they to the success of the company? What are the resources the new cofounder is bringing with them? This can take many forms, including knowledge of a particular skill set, money, or significant connections to people who can invest in the company to help propel it ahead of competitors.

In the next installment of Who Gets What, we’ll look at some of the ways founders try to solve the dilemma of equity split, and what our take is on those methods.


Bob Baker is a founding partner of Peak Corporate Counsel. He has worked with numerous founders on a variety of issues specific to startups. When he’s not advising innovators, he can be found at networking events, playing rugby, or hiking with his kids.

This article is for informational purposes only, and may not be considered legal advice.