One of the first tough decisions that have to make is how to allocate or split the equity among co-founders. The easy answer of splitting it equally among all co-founders, since there is minimal value at that point, is usually the worst possible answer, and often results in a later startup failure due to an obvious inequity.
Another common “failure to start” situation I see is one where the “idea person” insists that the idea is 90% of the value (and 90% of the equity). In the real world, the A startup is all about “execution” – meaning the equity should be allocated based on the value that each partner brings to the table in each of these dominant variables:
- Experience running a startup business. Running a new business starts with building a solid and credible business plan, working the , and building an organization from nothing, with minimal resources. Successful Fortune 500 executives need not apply, since most would not have experience with any of these tasks.
- Domain expertise and connections. If you are recognized as an expert in the , with a good reputation, and you know all the key vendors and customers, your value is huge. Building a product doesn’t get it distributed and sold. Expertise can be marketing, technical, financial, or sales.
- Pre-existing intellectual property. Ideas are not, until they have been converted into patents, trade secrets, trademarks, or copyrights. In many cases, one founder has started earlier and brings an important completed piece of work to the table, and that can have great value.
- Sacrifice and time commitment. A part-time commitment, while holding down a “real” paying job, is obviously not the same as a full-time executive role, especially if the cash compensation is nonexistent, deferred, or at high risk.
- Funding. Providing the major for an early-stage startup is a totally different dimension, but it usually trumps all the items above in demanding some equity. For purposes of commitment and business decision making, I always recommend that execution partners retain control of at least 50% of the equity.