Pareto Guide: Cofounder Equity Splits

by Hari Raghavan in

selective focus photo of we Founders heart-printed ceramic mug
How you should think about cofounder equity splits

On equal splits

This is the least political and the least controversial way to handle things at the beginning of the company. It's probably the right answer in many cases. However, it's worth asking a few questions, before you’re sure that it’s right for you... this exercise won't change anything about the actual ground truth... the purpose is just to raise for discussion things that could fester if they're not addressed.

Considerations for unequal splits

Consider the following factors and weights when deciding how much equity to give between cofounders.

#1 Full-time involvement

Weight: very high

  • Is one person going to be less-than fully involved on a go-forward, foreseeable basis?

#2 Capital raised/de-risking done

Weight: high

  • Has one person raised capital, acquired a number of customers, validated the hypotheses, or otherwise de-risked the company meaningfully?

#3 Past time and capital sunk in

Weight: high

  • Has one cofounder been working on this for (much) longer than another? Have they put (significant) personal capital at risk already?
  • For example – someone who’s been working on an idea for 6 months full time, or someone who’s invested $50K in working on the problem has probably earned a slightly greater share of the equity compared to another

#4 Duplicative skills

Weight: high

  • Is the second/third/nth person duplicative to existing skills? For example, a second product cofounder, or a second backend engineer, might not be as valuable as a designer or marketer, or salesperson.

#5 Credibility/networks

Weight: Medium

  • Does someone bring networks, or relationships, or something else to the table that needs to be accounted for?

#6 Salary differences

Weight: Medium

  • Is one person drawing significantly more salary than the other?

#7 Experience/other

Weight: Low

  • Is one person a topic matter expert on the company’s subject matter?
  • Is one person significantly more senior than the other (in a way that matters)?
  • The reason for this low weight is the presumption that everyone is necessary and relevant to some extent, otherwise, they wouldn’t be in the conversation.

Illustrative example

At the end of the day, there’s no right answer, but there are definitely plenty of wrong answers. It’s best to set the ranges on what feels right vs. wrong and work backward from there. For example, two founders might be:

  • One person worked on it solo for 6 months, has raised pre-seed funding, built a prototype, and is experienced and networked in the field
  • The other is about to join, bringing a critical skillset (the company can't succeed without them), and requires a $125K base salary for personal reasons

In such a scenario, they might decide that an equal split is definitely not right, but the second person isn't a true "junior" cofounder (i.e., 5-10%) either. So then the bounds are 50/50 on one side is "wrong" and 90/10 on the other side is "wrong", and this can help bound or shape the discussion.

Mathematical approach

If you really want a completely numerical approach (this might be suitable for a small fraction of radical candor/hyperrational teams), add/subtract weights to each consideration outlined above for unequal splits:

  • 1.0+ to very high
  • 0.5 - 0.75 to high
  • 0.3 - 0.4 to medium
  • 0.2 - 0.3 to low

Calculate the weighted average to dictate what delta in equity is appropriate. For example, if someone has an edge on most of the factors, it might be 3.3 vs. 1.4, so the equity would end up split 70%/30%.

More art than science

At best, this is a list of questions and directional weightings to inform the discussion and talk through what feels fair and right to everyone. That’s really all that matters. Good luck!

Startup equity calculator

Looking for other startup equity calculators, check out foundrs.com for a startup cofounder equity calculator— it's a good starting point.

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