Michael Seibull discusses co-founder equity splits and breakups, specifically for tech/software startups aiming for VC funding, focusing on pre-product market fit companies. He emphasizes the importance of motivating the founding team, especially during the challenging early years.
The core advice is to be generous with co-founder equity, a stark contrast to the "midwit" founder who overanalyzes contributions and skillsets. The goal is to incentivize founders to work tirelessly when success is uncertain. He suggests closer to equal equity splits as it helps strong founders stay motivated.
Vesting and cliffs are essential tools for all founders. Vesting distributes equity over time (typically four years), while a cliff requires a minimum tenure (usually one year) to earn any equity. These protect the company's cap table in case of unforeseen circumstances, such as a founder leaving due to personal reasons, non-performance, or disagreements. Vesting and cliffs are a best practice and should not be overlooked.
Co-founders must be essential to the initial MVP build and customer interaction. Giving generous equity aids in identifying and removing non-essential team members who might be better suited as employees. The co-founder title shouldn't be handed out lightly. The equity is about motivating people to achieve future milestones rather than rewarding them for the work they have done so far. The CEO must have the authority to fire underperforming founders, maintaining accountability. Discussing potential break-up scenarios is responsible.
For co-founder breakups pre-product market fit, YC guidelines suggest a token equity amount (0.5% - 2%) for those leaving before the one-year cliff. After the cliff but before product market fit, a departing founder should retain no more than 5% of the company. This ensures remaining founders and new hires can be adequately incentivized to drive the company forward. Severance is reasonable for fired founders (one to three months) but not typically for those who leave voluntarily. All departing founders should resign from the board, sign a release, and grant proxy voting rights to remaining founders.
The common flawed reasoning for disproportionate equity splits often stems from short-term thinking. "My co-founder agreed" is insufficient; the CEO must consider long-term motivation, especially during difficult times. The fallacy that the person with the original idea deserves more equity is incorrect; execution is paramount. A few months' head start doesn't justify a significant equity disparity. The same holds true for experience or for founders who come onboard after funding or launch: a tech startup is a long-term project and most of the work remains.
Salary should be distinct from equity; salary is the means for survival, while equity is a motivator for high performance and potential below-market compensation. Avoid tying someone's compensation needs to equity allocation.
Performance-based equity is generally discouraged because early goals are often fluid and subject to pivots. Innovation isn't needed in equity distribution; best practices exist for a reason. Part-time founders are rarely a good fit and shouldn't be considered in the co-founder equity equation. Dynamic equity agreements, with ever-changing terms, are overcomplicated and less motivating than a clear equity stake combined with vesting and cliffs.
Even if one founder stays with the company longer and contributes more in the long run, generous initial equity splits are still crucial. Early co-founders provide essential initial energy and expertise that get the company off the ground. Without them, the company might never reach its full potential. Ultimately, co-founder equity is a tool for maximizing motivation and increasing the chances of building a successful product.