WhoBuilt

How Much Equity to Give Your Cofounder

Jun 6, 2019· 4 min· 374K views·Watch on YouTube

Speaker

Michael Seibel of Y Combinator explains how to decide how much equity to give cofounders.

Think beyond the negotiation

Seibel says founders often miss key points when dividing equity. He argues the split should support cofounders’ motivation over the years it can take to build a company, even if they are not yet focused on that long-term commitment.

Use vesting as protection

Seibel cautions against treating negotiation as the main basis for an equity split. He describes four-year vesting with a one-year cliff: someone who leaves or is fired within the first year receives no equity, which limits the long-term cost of a cofounder decision that proves wrong.

Give equity that supports ownership

Because vesting provides a hedge, Seibel says it often makes sense to be more generous with cofounder equity. A meaningful stake can help cofounders stay committed when the startup struggles and act like owners by working late, recruiting friends, and contributing beyond daily expectations.

Consider equal splits, but assess the team

Seibel says equal splits are a useful rule of thumb when circumstances are otherwise equal, but they do not fit every case. CEOs should consider whether they expect to rely on their cofounders long term; if they do not see them as worth a generous grant, he suggests reconsidering the team.

Takeaways

  • Base the split on the long-term motivation the team will need, not only on who negotiated what.
  • Use four-year vesting and a one-year cliff to reduce the risk of a cofounder leaving early.
  • A cofounder’s equity should help them feel and act like an owner through difficult periods.
  • Consider an equal split when contributions and circumstances are otherwise equal.
  • If you do not expect to need a cofounder long term, reconsider whether they should be a cofounder.

Mentioned in this talk

Search inside this talk

What was claimed 2

Related talks

How Much Equity to Give Your Cofounder, Michael Seibel · WhoBuilt