Someone mentioned Slicing Pie (thanks David!) I invented the model and it's quite simple. At any given time, you simply apply this formula:
A Persons Share (%) = Their Risk / Everybody's Risk
This is the only way to create a perfectly fair split.
Every other method is based on a person's ability to negotiate or predict the future. Then, to protect yourself from the extremely high likelihood that you negotiated wrong or predicted the future wrong, you can use a time-based vesting schedule which will provide a little protection at the great expense of misaligning incentives.
Slicing Pie is a relative risk
model which makes much more sense. Risk is based on the fair market value
of the contributions. Unlike future value, fair market value is easy to know.
When someone contributes to a startup company they are accepting the risk that they may never get paid for their contribution. The amount of that risk is equal to what they would have otherwise been paid for the same contribution from someone who could pay them.
For instance, let's say you're a marketing guy who could make $100,000 salary doing marketing stuff for a company. If you did similar work for a startup company that had no cash you would be risking your $100,000 salary.
That is crystal clear, no ambiguity whatsoever.
Most people spend time trying to figure out how much value you are adding. This is impossible. Only risk is knowable.
The risk of spending time is fair market salary, the risk of contributing ideas is potential fair market royalties, the risk of contributing relationships is potential fair market commissions, the risk of contributing office space is fair market rent. Everything has a fair market value unless there is no fair market value in which case there is no risk.
So, if you want to know exactly how much equity to give your new employee (and yourself) simply keep track of what he is contributing and what you are contributing and figure out what your risk relative to his is.
This will always give you the right answer with noambiguity.
Want to add a third person? No problem, when they contribute, add their contribution to the total risk and run the calculation again!
Slicing Pie is nothing short of a magical formula that will always give you the right answer.
It's simple and it's perfect.
I've written a number of books on this topic. The books go into depth about how to determine fair market value, how to keep track of the contributions, how to differentiate between cash and non-cash contributions and what happens when someone leaves the company under different circumstances. I'd be happy to send you a copy of one of them if you contact me through SlicingPie.com
Slicing Pie runs against conventional wisdom. It's a new way of approaching an age-old problem that is fundamentally flawed. Any questions you may have can be addressed!