If you’re a startup with two co-founders, you may be tempted to split your equity 50/50. In theory, this may seem like an easy and fair way to divide ownership. However, an equal equity split may lead to a number of future problems that you should consider before going this route.
Although rarely discussed because it’s a sensitive matter, founder conflicts surrounding equity splits are quite common. In fact, conflicts surrounding equity splits are more likely to hurt an early-stage business than any other issue.
To help you understand why a 50/50 equity split can be problematic, we’ve outlined the most important reasons to avoid a 50/50 split below.
In both the short and long term, you and your co-founder will constantly be making decisions about your business. Hopefully you will agree on most of the decisions, but there’s bound to be a disagreement at some point along the way. If an issue can’t be resolved via discussion and it comes down to a vote, a 50/50 equity split will cause a deadlock. This is not to say that deadlocks can’t be resolved, but depending on the provisions in your Shareholders Agreement, it may be a lengthy process. In the startup world, a delay like this can make or break your progress.
Even a 49/51 split will avoid the deadlock situation described above—but how can you decide who gets the larger share? There are a number of questions you should ask when splitting equity which will help you determine each co-founder’s value to the company more precisely. Remember, fair is not the same as equal. Equity should be split based on the value that each founder brings to the table.
If you still arrive at the conclusion that each co-founder’s value is exactly equal, you should still consider a 49/51 split in which 1% is given to one co-founder out of trust for the sake of avoiding deadlock situations. This doesn’t mean the other co-founder is in charge; rather, it stands for each co-founder’s mutual belief in each other, and in driving the startup’s success in the future.
We know that splitting equity is one of the most difficult decisions for entrepreneurs. That’s why we’ve created Spliquity, our startup equity calculator, as a non-biased and automated way to calculate equity splits between co-founders. If you’re still unsure about how to divide your equity, check it out—it takes less than 5 minutes and it’s absolutely free!