There is an old saying, "success is like being pregnant, everyone says, 'congratulations,' but nobody asks how many times you were screwed to get there."
In startups, bad partnerships are the rule, not the exception. At the root of a failed partnership is how equity is split. Most often, equity is split in the beginning in fixed, equal chunks. This sets the stage for a series of unavoidable fights because things never turn out the way people think and the equity must be renegotiated over and over again. I call this the "Fix & Fight" model for equity splits. Each round of renegotiation embitters participants and can easily lead to the demise of the company.
I now know what I wish I had known before a number of failed ventures. Conventional thinking about equity splits is very, very bad for partnerships. Don't succumb to equal splits, "51%" splits, time-based vesting and all sorts of other standard practice equity agreements.
Instead, think of your startup for what it is: a high-risk gamble. Just like in a casino game, players place bets in hopes of winning more than they bet.
In a startup, bets consist of time, money, ideas, relationships, supplies or anything else someone contributes in hopes of "winning" a share of the future profits or proceeds of a sale. The value of these bets is equal to the fair market value
of the contribution.
Betting continues until the company reaches breakeven or Series A investment. After that, the company starts winning.
A person's % share of the equity (or winnings) should be based on that person's % share of the bets.
This model, called the Slicing Pie model
, will give your partnership the best chance of success because no matter what happens, each partner will always get what they deserve to get.
This is what I wish I had known.