A friend asked how to split equity with a technical person she’s bringing on in her startup. Here are some thoughts in no particular order.
Coincidentally, Steve Blank published a great article that’s relevant. http://steveblank.com/2013/07/29/building-great-founding-teams/
Are you considering equity because you have no cash?
That’s not smart. To Blank’s two questions tests, I’d add these two. “If you had the money, would you hire them as an employee?” and “If you had the money would they work for you as an employee?” If the answer to either of these is yes, then don’t give them equity – they are not cofounder material.
Make sure your goals are aligned.
You’re going to be practically married. Equity in a small company is worthless. You don’t cash in till the company is sold. Do you each now how likely it is that a startup will crash and burn? Have you discussed what you expect from each other over the next several years in terms of time commitments? Money infusions when the company needs it? What happens when another job offer comes along, or a life event (new baby, sick parent in another part of the world, etc).
Looking forward – what other co-founders will the company need? What key employees, board members and advisors will need equity kickers? Is there enough equity set aside for that?
Don’t neglect vesting.
Unless this is the last equity split you’ll ever need to do AND you won’t be ever raising money from equity investors, get a vesting agreement. http://www.bothsidesofthetable.com/2009/08/17/first-round-funding-terms-and-founder-vesting/
Equity is only cheap if you fail. In that case the person you gave the equity to got nothing. If you’re wildly successful equity is really expensive – but you may not care if you didn’t give away too much. In the middle it’s a crap shoot. Many companies end up in the middle.
Make sure the split is relevant to the value of each person’s contribution.
Probably one of the worst examples was a guy I knew in his 60’s. He’d had a woman working for him for over 30 years. She was hard working, loyal, and filled in some of his personality gaps. I doubt the company would have done as well without her. One day, out of the blue, he gave her 49% of the company. I’m really not sure why. Why was this a bad thing? Well for one, it wasn’t the reward he’d expected it to be. Equity in a closely held company is impossible to cash out if you don’t own a controlling interest. It could have given her half the profits, but profits were normally consumed by salaries and perks. Plus, it certainly wasn’t a motivating factor – she’d already been motivated. And there’s the legal rights she now has as a stock holder. There are many other ways to motivate and reward people besides equity.
Image source: https://upload.wikimedia.org/wikipedia/commons/7/74/Tarte_au_fromage_blanc.png
