Core Philosophy: Be Generous with Co-founder Equity

• Primary advice: be generous with co-founder Equity splits
• Goal: motivate founding team to work extremely hard during first couple years when things appear not working
• Biggest mistake: being stingy on equity during delicate early startup phase, causing departures
• Target audience: tech software startups expecting VC funding, pre-product market fit companies
• Jedi founder vs midwit founder: both generous with equity vs overthinking skill sets/contributions/time commitments

Equity Distribution Strategy

• Focus on motivating co-founders today AND tomorrow (years 2-4)
• Equity vests over 4 years - prevent resentment thinking in later years
• Typical advice: go for close to equal equity splits (don't have to be exactly equal)
• More generous = expect stronger founder to stay motivated longer
• Remember: most work in company hasn't been completed yet when giving co-founder equity
• Equity motivates future work vs rewarding past work

Vesting and Cliffs Structure

• All founder equity should vest over time period
• Standard: 4-year vesting schedule
• One-year cliff: no stock earned until completing one year at company
• Applies to ALL founders without exception
• Protection against life circumstances: family changes, illness, non-performance
• Enables founders to let others go or leave without destroying cap table
• Best practice - don't innovate on this structure

Essential Co-founder Criteria

• Co-founders must be essential to founding team
• Smallest number of people who can: build MVP, get it to customers, start learning
• Being generous with equity helps remove non-essential "co-founders"
• Co-founder title shouldn't be given out casually
• Teams with 5-7 co-founders indicate missing conversations - 7 people not essential for initial product

CEO Authority and Accountability

• CEO should retain ability to fire non-performing founders regardless of equity split
• Must be "captain of ship" - someone ultimately accountable
• CEO needs responsibility to let people go who aren't performing
• If unwilling to join under these circumstances, consider starting own company as CEO

Co-founder Breakup Guidelines (Pre-Product Market Fit)

Before One-Year Cliff

• Extremely typical: departing founder gets token amount (2-5% equity)
• Remember: pre-product market fit = no evidence company will work
• Vast majority of work still needs completion

After One-Year Cliff (Pre-Product Market Fit)

• Departing founder should retain no more than 5% of company
• Often means giving back some equity
• Rationale: so much work left to be done, motivate remaining team
• Departing founder can't help increase company value anymore
• Holding large equity reduces company success chances

Severance and Transition

• If founder fired: reasonable to give 1-3 months severance
• If founder leaves voluntarily: severance not typical
• All departing founders must:
  • Resign from board
  • Sign release
  • Often give proxy voting rights to remaining founders

CEO Departures

• Sometimes CEO leaves/gets fired due to life circumstances
• New CEO arranges breakup accordingly
• Previous CEO should understand same expectations
• Same rules apply even to departing CEOs

Bad Reasons for Unequal Equity Splits

"My Co-founder Agreed" (90%/10% split)

• Perfect example of optimizing for today vs tomorrow
• Think about year 3 motivation when everything difficult
• CEO must think about tomorrow regardless of co-founder's perspective
• Be more generous to compensate for future difficult times

"I Came Up with the Idea"

• YC sees ~30,000 applications every 6 months - ideas are "dime a dozen"
• Execution is the actual game
• Co-founder essential for execution, otherwise shouldn't be co-founder
• Coming up with idea not great reason for 90/10 split

"I Started 6 Months Before Co-founders"

• Ask: how much work left to be done?
• Traditional tech software startup = 99% of work remaining
• Could be 10-30 year journey if successful
• 6-month head start not significant in long-term context

"My Co-founder Needs Salary, I Don't"

• Think about salary and equity differently
• Salary = money needed to live (rent, food, basic survival)
• Equity = motivation to work extremely hard and accept below-market salary
• Never reduce equity because someone needs more salary
• Give everyone salary they need to live + equity needed for motivation

"I'm Older/More Experienced"

• Experience can contribute (fundraising, other capabilities)
• But if making them co-founder = key contributor you couldn't do without
• Be careful about their long-term motivation
• Should be generous with equity as result

"I Hired Co-founder After Raising Money"

• Fundraising doesn't massively change success chances
• Lots of startups raise money, very few generate $1B+ revenue
• Even with $100K-$500K investment, 99% of work still remains
• First launch/MVP just beginning of journey

Common Bad Advice to Avoid

Performance-Based Equity

• Unclear how to set goals at beginning of tech startup journey
• Goals change frequently, companies pivot
• Measuring things precisely at start is fallacy
• Don't innovate on equity distribution - use best practices
• This is not area for innovation (focus innovation on product/customers)

Part-Time Founders

• Part-time founder isn't really a founder
• Shouldn't be considered in equity equation
• Most viable companies don't have part-time founders
• If want to be founder, should work full-time

Dynamic Equity Agreements

• Too fancy and ill-advised
• People more motivated knowing what they have upfront vs uncertain rules
• Often created by people who don't understand value of vesting/cliffs
• Protection comes from vesting/cliffs, not fancy formulas
• If can't ask co-founder to leave when not performing, shouldn't be doing startups
• Must respect how hard this is and how much work co-founders contribute

Long-term Perspective on Successful Companies

• Over 10-15 years, often one founder sticks around much longer
• Examples: Jeff Bezos (Amazon), Mark Zuckerberg (Facebook)
• Might think this means they deserve vastly more equity
• But beginning extremely important - first 4-6 years where most value created
• First 4-6 years when most companies die
• Even if you're the one who stays longest, be generous with co-founder equity
• Co-founders provided activation energy needed to get in the game
• Without them, might not be in game at all
• Early years and co-founder motivation crucial for successful products
• Use co-founder equity to give best chance of building something people want
• After success, you're doing better than 99% of startups and rules change