Co-Founder Equity Mistakes to Avoid | Startup School

In order to get your startup off the ground it's critical to keep your co-founders motivated. One of the best ways to do that is to figure out a fair co-founder equity split. In this episode of Startup School, YC Group Partner Michael Seibel explains the ins and outs of co-founder equity, why it's important to be generous with that equity, and how to avoid bad advice that can lead to co-founder breakups.

00:00 - Intro
02:03 - Co-founder equity split
06:39 - Co-founders break-up
09:42 - Bad reasons for very unequal equity splits
14:06 - Common bad advice
17:14 - Final thoughts

[ycombinator]

What's your strategy for motivating co-founders in the early days?

[JaySarmaz]

Quick summary if you don't want to listen to the whole video:
- Be generous with co-founder equity to ensure long-term motivation and commitment.
- Use vesting and cliffs for all founders to protect the company if someone leaves.
- Co-founders should be essential and motivated by equity for future work, not past contributions.
- Avoid performance-based or complex equity structures; focus on straightforward, motivating equity splits.
- CEOs must have the authority to remove underperforming co-founders and should plan for potential breakups.

[journeytothevoid]

Recently got kicked out of my startup (no funding, bootstrapping) as the CEO/COO for performance issues and personal attacks/arguments. It has been a learning experience.

The CTO did the product building and consistently leveraged that in arguments so we were not all equally yoked. Unfortunately we live together so that exasperated the relationship (CTO and I). I started to close bank accounts and I’d to close the credit cards I personally guaranteed but now we’re in limbo. Not interested in talking to him at this point. I just want to cut ties without messing people over.

[chapterme]

Chapters (Powered by ChapterMe) -
00:00 - Intro
01:50 - Equity Overview
02:03 - Co-founder equity
03:11 - Vesting and Cliffs
04:44 - Co-founders must be essential to the founding team
05:45 - What is equity about
06:39 - Co-founders conversations if things don't work out
07:05 - Co-founder leaves before their 1-year cliff
07:28 - After 1 year cliff but pre-PMF
09:42 - Bad reason for massively unequal equity split
10:30 - I came up with the idea
10:59 - I started working 6 months before my co-founder
11:26 - My co-founder needs a salary, and I don't
12:10 - I'm older and more experienced than my co-founder
12:41 - I hired my co-founder after pre-seed / seed round
13:11 - I hired my co-founder post launch
13:19 - Sum-up: Short-term thinking
14:06 - Common bad advice
14:20 - Performance based equity
15:12 - Part time founders
15:40 - Dynamic equity agreements
17:14 - Wrap-up

[IncomeBoost]

Once you find the right co-founder, you won’t hesitate to give them a fair share of equity. But finding the right cofounder is very hard. And yes you have to be very picky about it.

[BradThomas]

Equity is for sure a part of motivation. However, the person HAS to believe in the 'why' behind the product. It's incredible how much someone will get behind and work their butts off if they strongly believe in what's being created. Before you give any equity or go the next level, and make someone a founder, make sure they have a hardcore belief in what it is your building.

[eQ-]

Great advice. I started an enterprise software company with my cofounder and we split 50-50. He resigned from company but still shareholder. I was left to do all the heavy lifting. The company has turned out pretty successful and I can’t get him out. He’s getting dividends and he didn’t do much. That hurts. I’m building the second company and I am wiser now.

[cieliczka]

Vinod Khosla would agree. In the interview with Altman he revealed the he advised his son to keep only 15% in his startup and gave the rest to co-founders and first employees

[mwaffi]

You're contradicting yourself with first saying the later years of a company are worth equity and then at the end saying the first years are very important.

[HEART-A-L-K]

I volunteered to a mentor two high school students in am entrepreneurship completion.
We won the competition with our proposed EdTech startup idea, which came from the two high school students that mentored.
But unlike me, a software developer, they didn't have the expertise and resources to bring the idea to life even as an MVP.
My spouse and I are investing our personal resources to develop the MVP and bring the app/startup into the hands of real users.
We have transitioned into a registered startup from a mere winning idea presented in a competition. The parents of my co-founders are contributing nothing towards to venture, the coordinator of the competition insists it was their idea, and they must own a greater percentage of the equity. I, the current CEO/CTO presented all co-founders an agreement that gives each one of the the students 15% equity pre-mvp in recognition of their initial involvement, plus other future benefits should we succeed.
What's your comment, advice and recommendation to me?

[svenst]

Great! Can u share the typical splits in percent for 2 co-founders or maybe 3?

[CyY-vonb]

How about for solo founder's first hires?

[rb]

How common is it for vesting to reset on funding rounds? A seed investor asked for this, we eventually negotiated that we wouldn't, but it felt like they considered it standard.

Great video that any tech founder should watch!

[codewithfongoh]

Wow, just wow. Thank you so much for this.

[iLLSon]

Loving the Columbia sweater, link to it?

[MrFredericandre]

Interesting but some of this doesn't apply to AI-startups. We're in a new era, the risk-reward ratio has changed.

[phpn]

You can't talk about "founders" without defining what you mean by founder. Corporate structures and shareholder agreements distinguish between equity and directorship. It's typical of some VCs to push startups to distribute equity as broadly as possible because it's how they retain a controlling interest even as a minority shareholder. Dividing geeks is a good way to keep them in check. In contrast, solid companies have a strong directorship that allows the "founder and CEO" (or a very small core team) to conduct the company through difficult decisions by having a controlling interest. Think of a republic as opposed to an anarchy : Legislatures that have a majority party are more efficient than those who are split across the board. Just ask the French. Mark Zuckerberg could not have driven Facebook the way he did, had he only have a congruent share of the pie. Corporations, kids, are ideally benevolent dictatorships — they never work as a kibbutz. Yes, you need a cliff and vesting, and you need to reward commitment, but the best companies are those whose founders are motivated by the solution they seek to build, and not just the cash they dream to earn. Missionaries as opposed to mercenaries.

[umutiik]

I think this is good advice. But it’s funny how little of this logic applies to early employee grants!

[saivaraprasad]

4 years is too short a period for getting the job done. Is there a reason why atleast the co-founder vesting is stretched for more longer? - Let's say 10 years