Enhancing the Equity Split Conversation

Keyvan Firouzi, 

CFA, Director, Valuation Services

Today1 we’re proud to release an updated Co-founder Equity Split tool. We released the first version back in November to help startup founders divide the ownership of their startup fairly and rationally among their team. Since then, we’ve been collecting feedback from founders about how it could better help them with their decision.

With this release, the tool gives founders clearer feedback about the importance of each team member’s contributions in the context of the startup’s unique challenges.

Improving analysis

Co-founder Equity Split

An example of high-level results from the tool

We understood from our first version that the tool was best used as part of a larger discussion. Our thesis was that all of the existing frameworks for dividing equity previously created by founders and advisors were either too abstract or too difficult to quantify to actually be useful. We believed founders could benefit from a set of questions that help them think about who on their team is contributing value to the venture and how those contributions solve problems facing their specific business.

To that end, we reworked our algorithm to be more sensitive to the ways certain kinds of businesses need to react to challenges, both on the product side and on the business side. We also now provide a deeper analysis of the results to help founders make sense of the ways the variables work together. Now co-founders can see how each person expects to contribute with consideration of the challenges the venture expects to tackle.

For example, a product designed to serve a very large market might be unusually dependent on user experience: if the key to success is to solve a problem for a high number of users, the solution has to work for the users without much friction or education, which means the designer’s contributions to the product will be especially important. A great example of a startup that grew massively by putting user experience design first is Instagram.

For a different startup, perhaps the service being built will fundamentally change the way customers solve the problem. In this case, the technology behind the solution is exceptionally important, because it is the key to the product’s differentiation and functionality. The BackRub project that became Google is a perfect example of a tech-dependent venture.

We believe the new version of Co-founder Equity Split will surface some of these relationships between talent, roles, and challenges—helping founders understand how the value each contributes goes to solving problems and opening doors for the venture.

Starting conversations

The other thing we learned from users is that founders disagree more about the relative importance of contributions than they do about the contributions themselves. We realized that the solution to this problem, in addition to doing a better job of explaining our rationale for the split recommendation, is to help founders use these questions and results to start a conversation amongst themselves. After all, co-founders are all on a team together, and one of the reasons splitting equity fairly is so important is that investors look to the rationality of a startup’s initial equity split as validation for the team’s ability to solve difficult problems as a group.

To better facilitate a group discussion about equity, we added the ability to invite your other co-founders to go through the experience individually. We recommend doing so blindly, keeping your answers private at first, and coming together afterward to share the various results and each co-founder’s reactions. The hope is to help a co-founding team understand whether they agree on which problems are facing their venture and who is planning on solving which piece of the puzzle. If there is disagreement, the analysis should help guide a conversation to uncover and resolve differences in perspective.

Lastly, we added some indication when a founder’s past experience is significant enough to make the venture more likely to succeed overall, as well as which founders are committing what we call "sweat equity" i.e. showing founder-level commitment to the project—the stereotypical “long hours and ramen noodles while putting cash in rather than taking a salary” situation.

As our company-as-a-service platform Gust Launch continues to grow, incorporating new startups every day and helping them issue stock to their co-founders, we’re increasingly committed to supporting nascent high-growth ventures. We hope our tool will help co-founding teams arrive at sensible and objective divisions of their startups’ ownership, for the benefit of their ventures, their co-founders, and their ability to signal to investors that their team has what it takes to handle big, difficult problems. After all, isn’t that what startups are all about?

1 This post was originally published on May 16th, 2017.

Check out the Co-founder Equity Split tool:

See Your Split

This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.