When I first got a job in venture as a Managing Director at Techstars, I loved meeting founding teams with two equal cofounders – one technical and one business-focused.
It seemed obvious back then that a successful team needs to know how to build and how to sell and that this kind of composition of the founding team was both necessary and sufficient.
Since then, I invested in over 130 startups and my thinking on what is the best founding team, and how to allocate equity has evolved.
My main conclusion is that being equal partners may not be an ideal composition for every startup, and can lead to a problematic dynamic in the early days and as the company grows.
Why 50/50 equity split may be problematic
Let’s start with an obvious issue – 50/50 is a tie.
That is if the founders disagree, how do they move forward? You might think that the CEO makes the ultimate decision. While this is technically true, in the case of 50/50 founders of an early startup it is not.
The issue is that the company’s governance consists of 3 layers – executives, board, and shareholders. When you have a startup with just 2 people they represent all of these 3 layers. This means that they are shareholders, and as shareholders, they elect the board of directors, and as the board of directors, they hire a management team, including the CEO.
So basically when the founders totally disagree, and it is a two people founding team they are stuck. Being stuck and constantly arguing may lead to a lot of tension and a startup may fall apart because of the founder issues.
Most early stage startups aren’t killed by competition they are killed by founders fighting with each other.
Founder Breakup
In his post on why startups don’t succeed, Paul Graham pointed out that 20% of startups he worked with have a founder leave.
When a founder leaves early on, it doesn’t necessarily mean that the startup can’t go on, but it certainly isn’t great.
Why do founders disagree? There may be several reasons, but the top two in my experience are:
-
Lack of initial vision/mission alignment
-
Things are not going well
The lack of initial vision alignment is a serious issue. Some founders rush into working together without truly and fully committing to the mission. Another reason for the lack of mission alignment could be a lack of Founder Market Fit and a lack of a strong problem that the founders can solve for customers.
If the founders don’t know the space well or don’t understand their customers, this means they are building something that no one really wants. Obviously, they will have a hard time selling it, and things aren’t going to go well.
This is true not just for cofounders but employees in general – when things are not going well in a startup people leave.
The role of the CEO
Another way to think about the problem of equal founders is through the lens of the role of the CEO.
It is clear that in the later stage companies, the role of the CEO is to be the ultimate decision-maker. As much as it is hard to accept for a lot of early-stage founders, the same is true at a startup. I’ve spoken to many technical founders, CTOs, who were surprised when I told them that their cofounder, who is the CEO, has the ultimate decision-making power. They said to me, but Alex, we are equal.
When you choose someone as your CEO you are giving them the reigns of the business.
If you are not happy with how they are doing, you vote them out through the board of directors or the shareholder structure. But as long as they are the CEO, they make the ultimate decisions on the business.
You can see how being 50/50 cofounders can cause this confusion, but there is no doubt about how corporate governance actually works – CEO is the ultimate decision-maker.
Founder Vesting
Before we get to discussing team structures that may be better, let’s talk about founder vesting.
Every single founder, of every single startup, since day 1 should be on a 4-year vest. This is non-negotiable, non-bendable. It just has to be done.
Even if you’ve known each other for years. Even if you had previous startups together. Even if you have 110% trust in each other. Doesn’t matter, the vesting must be in place.
Circumstances change, people change, you just never know.
If you do not have vesting in place, and your cofounder leaves you are going to have a significant chunk of your cap table walk out the door. I’ve seen these situations, it is incredibly painful and almost impossible to undo.
I’ve seen cofounders who spent 2 months at a startup walk away with 10%+ and then when asked to give it back saying NO. They’ve contributed very little and then the other founders are grinding for years and making them money. Yes, it is exceptionally unfair, but legally, nothing can be done because the vesting wasn’t in place.
Another issue to consider is scaling. When the founders start the company, especially first-time founders, they rarely think about scaling the business to thousands of people. In many ways, this is a great problem to have, because this means that the company is very successful.
The issue is that founders themselves don’t always scale with the business.
This means that your cofounder, who is, for example, a CTO day 1, may not necessarily be a CTO in 3 years, and the same is true for the CEO as well.
A combination of vesting and unequal share split helps better prepare companies for scaling.
The Ideal Team and Equity Structure
So what is the ideal team and equity structure for an early-stage startup?
It really depends.
In some cases, I would advocate for a near equal split, like 49/51 or 40/60. I believe this is an ideal structure for a strong partnership where the second founder would feel incredibly motivated, and also empowered to speak up and push back. Despite an uneven split, I would argue this is a peer or partnership of ‘equal’ setup.
Yes, the CEO will make final decisions. Yes, the second founder reports to/works for her. But the sheer amount of equity signals the weight and the strength of the partnership. At the same time, because the amounts are not exactly equal we have clarity on who is the ultimate decision-maker.
In cases when there are 3 cofounders I’ve seen an equal split as well – 33% to each. For the same reason that a 50% split is a bad idea, this is a bad idea too. To start with CEO is not even in control because the other two founders can remove him/her, because they collectively have more votes.
If the split is, for example, 60% to the CEO and 20% to the other cofounders then CEO is in charge. For a 3 people founding team this may be a better approach. Again, remember that 20% of a startup can be absolutely huge, so it is not like other founders are getting minor stakes.
I am absolutely not advocating a dictatorship, I am the first in line for having founding teams where everyone has a massive upside and empowered to contribute and drive the business forward. I strongly dislike the 95/5 split, for example, and never view it as a true partnership.
There are configurations between 50/50 and 95/5 that I think can be very effective and successful and enable and empower both the CEO and the founding teams to achieve the best results.
And one last thing, every single startup, just like every single person, is different. There are always unique circumstances and some of you should decide to split everything equally two ways or three ways. That may be the right decision for YOU.
As long as you are making an informed decision and as long as you have a founder vesting in place it might work great.
