I am right in the middle of this now. Taking a 100k investment. One thing that is incredibly helpful is to use a LLC instead of an S-Corp. The flexibilty of dividing profits, responsibilites, etc., is enabling agreement. And you don't need a lawyer!!!!
You might find this an interesting read as well. It goes one step further and gives frmewrk that hellps to be more objective.
here is another interesting link
I've always treated co-founders with the respect and reward each deserves (per the the value they add to the company) but my style is such that I run the company as the founder with others coming on board with option grants, using a Stock Options Agreement that is in line the industry standard for high-tech/software startups, and not common stock, which is reserved to the founder/enabler/starter.
I agree with Dharmesh regarding the obvious foundational flaw in dividing equity on equal basis. I find that the only position to be in is not to "argue" for equity but to negotiate bringing people on board under fair terms.
There is a flipside to this topic. I recently (actually the same day this article was written) had to walk away after a year with a company that my business partner and I founded because we could not agree on equal equity. In the beginning we had divided the equity 75/25 because he already had a business plan and was talking to investors and needed me to quit my job and join him to build a prototype and put together an engineering plan. After a few months it was evident that the idea would not get funded. We decided to stick with it and gradually (over one year) came up with a new business plan, new product, new investors and new customers. This idea does look like it is fundable, but everything was the joint effort of both founders; however, the original founder is adamant about not giving up any more of his equity (based almost solely on the belief that as CEO he deserves almost all the equity). I went through analysis of what a fair equity division would be (even using the pie calculater mentioned by Rajan), talked to almost every founder/entrepreneur I met about this topic, and came to the conclusion that there was strong justification for this to be a 50/50 partnership.
Maybe there will be something to salvage here, but I am preparing my self to learn about the transition out of a partnership which could be complicated since he hopes to secure funding from investors that I made the introduction to. I have no idea where this will lead - there are several legal issues to address if we do dissolve.
I learned three important lessons, though. The first, choose your business partners very carefully. In some situations I may have considered forging ahead but I learned a lot about this person through this experience that raised other questions than just the equity. Trust is critical between founders. There should be trust that if contributions change significantly, then equity may be redistributed. I don't believe this should be done lightly; however, there need to be thresholds set where you will agree to reallocate if they are exceeded. We actually did set these, but they were not honored.
Second, don't get emotionally attached. I believe in the idea we have created; however, I do not believe the opportunity cost of going forward in the current relationship versus exploring something new is worth it. It would definitely require 3-5 years (or longer) to reach an exit from this venture. There are enough ideas out there that I can take what I have learned in the past year and apply it to a different venture.
The last lesson is to consider everything a learning experience. Even though this did not work out, I do not regret the last year. Everything I learned will be helpful towards my next venture and I certainly had more fun in the past 15 months than in any "job" I have ever had.
My first experience was the opposite of Dharmesh's post, but over time I have come to realize that it was a fluke.
A high school buddy and I formed a software company with 50/50 split, we spent seven years building it, even raised some VC money (they didn't like the 50/50 split at all). In the whole time, we never had an argument or major disagreement. We sold out to a public company 11 years ago, and we still meet for lunch once or twice a month.
Since then I've been involved with numerous startups and have seen the above-mentioned problems with 50/50 or 33/33/33.
Despite my one very good experience with 50/50, I would definitely agree with this post.
why determine all % from beginning?
it's near impossible to guess what will happen which is why I created this google spreadsheet (still somehwat rough)
just save a copy to play with it
it's pretty straightforward and requires there be one "decider" who is kept in check by a rule that he not be payed more than a predetermined rate.
It ensures fairness no matter what happens to the company - investment, purchase, hiring, firing, quitting etc.
It could be made much more sophisticated, it's just a start.
I named it "friend keeper" for obvious reasons.
Control over the company goes hand in hand with this too. If someone has more equity (more risk) wrapped up in an endeavor, they are naturally going to demand more control over decisions. And deservedly so.
i was stupid enough to trust my partners to be fair and not negociate a management contract in a 50/50%company. they put an initial investment of 30,000euros..and out of that after 4 years made 4 shops, invoiced 500,000euros,.recuperated losses , made profit...never got a salary.any money at all!!!!..and now they claim they had as much input as myself in the company and that my claims for a misery salary of 1200,euros are unfounded.legally they are in the right .NEVER AGAIN anyone want to buy???
This could be a series of articles on common issues faced by founders of startups. Honestly, many of my ideas for projects/ventures have languished mainly because I did not have a good grasp of what would be the "right" amount of equity to offer people when I could not afford to simply pay for their services. Would love to see this topic expanded.