How should I split equity with my co-founder?

Our general and non-controversial answer is to split equity in a way that is fair and motivates all co-founders. We realize though that this is like saying “society should strive for world peace” – easy to say, hard to achieve.

Our practical answer is that initially one founder (or a subset if you have three or more co-founders) should have a controlling stake. While equity dilutes over time, having a controlling co-founder early on often aids a company’s early success and survival.

Equity allocation is one of the most critical – and contentious – steps in founding a company.

With good reason.

Equity is ownership, representing the primary upside in your venture. If you’re dedicating your time, blood, sweat and tears, you want your efforts to be properly represented in your ownership stake in the company.

But a formula for allocating equity perfectly does not exist and likely never will. The process is challenging, subjective and elusive. You must weigh hard to quantify factors such as expertise, leadership and commitment, while today’s priorities may shift as the venture evolves.

Many co-founders default to an equal split because it is easy to explain and avoids difficult, provocative conversations. However, this approach often just means postponing essential conversions about contributions and value.

In contrast, granting a controlling stake to one co-founder yields advantages in our experience.

Resolving Deadlocks

The controlling co-founder can break ties, enabling and encouraging quicker decision-making.

Stress-Testing Relationships

In a Machiavellian way, initial power imbalances reveal cracks in early co-founder dynamics. These cracks can either be addressed to strengthen the relationship. Or the cracks may prove too much and signal that the relationship is unlikely to last, encouraging an amicable split before years of hard work and millions of dollars are raised and a separation becomes impractical.

Addressing Non-Performance

A controlling co-founder can remove, or at least leverage a controlling stake, to effectively remove a non-contributing co-founder.

The dynamics works both ways. If the controlling co-founder underperforms or dismisses the other co-founder’s views, then the non-controlling co-founder may recognize misalignment sooner and take steps to move on to another endeavor before sacrificing his/her valuable time and efforts.

While there is no perfect formula for splitting equity, thoughtful and deliberate allocation is crucial. Neglecting or carelessly handling this step often leads to conflict and may even derail your startup.

Think it through. Have the tough conversations now to set your startup up for success tomorrow.