Really struggling with the equity split between me, my cofounder and a developer who decided to join our little team. I initially agreed with my cofounder that the split between us to be 65% (me being CEO and who contributed the most on the idea so far) and 35% ( tech cofounder). Would you be kindly suggest what would be the equity split between us three?
Getting a perfect equity split is actually pretty straightforward, but it requires that you break from traditional approaches which require you to predict the future and determine a fixed split in advance of any actual work getting done. By splitting 65/35 you have fallen into a very common trap that leads most (more than 50%) of startup companies towards equity disputes that often require legal intervention. The conventional thinking in equity splits is fundamentally flawed.
Instead, think of your startup as a gamble (because it is). You and your cofounder will "bet" on the future value created by the company. Your bets will be in the form of unpaid compensation for your time, ideas, relationships, etc. or unreimbursed expenses or cash investments. All of your bets will have a fair market value which is what you would have paid if you had the cash. Betting will continue until you reach breakeven or Series A.
When the betting stops you can simply add up the fair market value of your bets and use this as the basis for your split.
A person's share of the equity should logically be based on that person's share of the bets.
This is not only logical, but obvious and unambiguous. All other methods for splitting equity are random guesses of a highly ambiguous future.
This approach, known as the Slicing Pie model, is used successfully by startups all over the world and is the only way to create a fair equity split.
I highly recommend watching the video from Y Combinator's Startup School.
Quoted from Kirsty Nathoo:
"In general, we think that equity should be more or less split evenly, amongst co-founders. I'm talking about more or less, it doesn't have to be exact. But often founders will push back on this. Some of the examples that they, or some of the reasons that they will give to us for saying, "No, I should have 70% of the equity and my co-founder should have 30% of the equity. It's because I thought of the idea." Or "I built the prototype." Or "I closed the first 20K in sales." Or "I started three months before my co-founder." Our response to this is everything is ahead of you. This is the early days of the company and if you've worked on it for three months, you've probably got five, 10, 15 years of this company ahead of you, if it's going to be a success. Think about forwards, not backwards. All the effort is in front of you. You're going to be iterating on the product, the prototype is probably going to bear no resemblance to the final product that becomes successful. It's all ahead of you. The time commitment, again, it's 10 years, 15 years. It's a long time. Three months is just a drop in the ocean."
See full transcript here: https://jotengine.com/transcriptions/kCRjSed1Y90DqCb8YCfgew
I agree with her view.
If I were to get involved as a third party, I would ask for %5 and increase my share as the rate of my skills improve the project.
There are a lot of discussions on this site around this topic, I first suggest you search through them.
Second, you and the tech founder are the founders, your agreed percentage split is locked in until you feel the need to bring in another founder level team member, because they have something the company needs that you don't have (IE - marketing, sales, etc TBD).
Now your initial founders equity will be diluted from here forth, based on how much investment you take and what employee pool you two have decided to allocate. Generally this is between 10% – 20% of total founders stake. If this is a real startup, and your business has high growth potential, then your equity must be protected to ensure sustainable dilution over time.
If I read you correctly, this new developer is a "pre-employee"... thus you can allocate only from this 10% – 20% pool. If you give him/her 20%, then you will have none left for your other future employees. The math is the math.
But it is a difficult issue if have when someone working full time (if that is so) on your project and not getting paid -- this is a dilemma.
Best reading I can offer you on this topic is The Founder's Dilemmas, by Noam Wasserman.
How much motivated should be an entrepreneur, in order to succeed in his business?
it kinda depends on the role of that person - are you expecting this employee to be making company decisions? should they be involved with the board? Is this someone who will be a CTO? If so, then a few points (1-5%) of preferred shares might make sense. If not, then an employee option is more the way to go