I meet quite a few first time entrepreneurs and in many cases, by the time I meet the co-founders they’ve already decided that all is equal. You came up with the idea together and you’re both, or all, if more than two co-founders (which I think is another mistake), working hard so therefore equity is split evenly. It’s the easy thing to do…and it’s one of the biggest early mistakes you can make.
We all like shiny new things. At the beginning your idea is shiny and new. You’re going to change the world together and its exciting. Then the work begins and it’s not easy. Long nights, strained personal relationships, no money, long sales cycles, VCs not getting back to you, and you’re both dismayed that everyone isn’t as excited as you are. And then your co-founder isn’t as excited either and needs a “break”.
When the rush fades and the struggle continues, not everyone is up for the fight. It’s what separates the winners from the wanna-bees. Some reasons this might happen:
- Need money: Your co-founder needs money and so decides that its better to get a job. They promise to still help and be involved. That may be true, but while you’re feeling the pain they’re getting a paycheck.
- Need the girlfriend (or boyfriend): The stress of the job is affecting their relationship to the point that they need to choose. They don’t choose the company and start putting in less time than you do.
- Need their own time: They’re demoralized that all the hard work isn’t paying off and decide that they need to take their foot off the gas. Your foot is still burying the pedal to the car mat.
All of these are valid reasons. They’re not wrong, they’re part of life. I’m not saying that if you’re homeless and stealing to eat, or you’re on the verge of divorce and you haven’t seen your kids in weeks because of your job that you shouldn’t re-evaluate your priorities. What I am saying is that all of these outcomes change the equation and 50% each doesn’t seem so fair anymore when one person is all in and the other isn’t. Of course, it’s also important to not fall in love with your ideas and know when to fold if it becomes evident that maybe your idea wasn’t so hot after all. I’ve folded a couple of times and the lessons learned paved the way for later success. If that time comes then its a realization moment between founders and it’s bittersweet but until that time its only fair that everyone that is getting an equal share is putting in equal effort.
The right thing to do is set expectations and lay out fair equity principles and an agreement from the beginning. It’s the next thing you do after registering your company (which is the first thing you do before you start taking any action on an idea). Be fair with each other and talk to a lawyer to get this done. Some of the concepts to consider include:
- Allocation of Founders percentages
- How the percentages are manifested in shares
- Vesting: dictates when founders earn their shares and therefore guards against someone getting 50% of your company when they walk away and you’re still running the ship. Typical share vesting is either time-based, performance-based,, on a seminal event or milestone or a combination of all.
- Any provisions where someone can be bought out
- Any causes that result is losing equity
- Creation of an equity pool that will be used down the line for early employees, investors, etc.
If you take early VC funding be prepared for the VC to want to re-visit and maybe change all of this anyway but that may never happen and even if it does, you need these guiding principles to ensure that whoever puts in the blood, sweat, and tears enjoys the fruits of success.