With the saga of Twitter’s lost founder reverberating around the web, now seems like a good time to hear from some local heavyweights on how best to divvy up ownership of a start-up.
“Fairness, and the perception of fairness, is more valuable than owning a large stake,” writes Joel Spolsky, in answer to this question, on the Stack Exchange vertical OnStartups. That’s an interesting formulation, since it implies that that what is truly equitable will not always appear so, and that the perception of the outside world is equally meaningful.
There will be drama, write Spolsky:
“Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc. That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because “it was my idea,” or because “I was more experienced” or anything else. Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, “to heck with it, we can NEVER figure out what the correct split is, so let’s just be pals and go 50-50,” you’ll stay friends and the company will survive.”
Fred Wilson chimes in on his blog to say that the same holds true in the venture business. “Founding teams that allocate the founders equity fairly stay together a lot more than founding teams where one founder has a much better deal than the others. The same is true of venture capital firms. The most stable venture partnerships are those where the partners share in the carry equally or near equally. At the end of the day, this is as much about respect as it is about money. And when people feel disrespected, they are going to leave at some point.”
No matter how the pie is divided, the other critical point is that the shares need to be vested for a period of years. Helping to form the initial idea over beers isn’t the same as quitting your day job and putting yourself through hell to create a new business from scratch. Only those who have been along for that ride really earned an equity stake. We’re looking at you, Winklevi.