Nothing can test co-founder relationships like dividing equity. But it doesn't have to be so hard.. Years ago, Todd Sampson and I added Scott Rafer to the cap table as a co-founder more than a year after we started MyBlogLog, and it's a model I still use today with clients.
The Background:
Todd and I had already been working on MyBlogLog (MBL) for a year. The service had been live for nearly that long, it was making (a small amount of) revenue and we had already engaged in acquisition talks for $1M. Scott cold emailed us suggesting we transition MBL from a stats company to a social network. We agreed and eventually brought him on as co-founding CEO.
How much equity do you give someone in that scenario?
The Solution:
I don't remember who ultimately came up with this, but I'm going to assume Scott, because he was always a pretty thoughtful and creative guy. Anyway...
1) Let's assume the company is worth $1M right now, because someone had discussed buying MBL for that amount a few months prior.
2) It's fair to say Todd and Eric should split that value between them, because they were the co-founders up to that point.
3) We were raising capital, and a term sheet would offer a new pre-money valuation based on what investors thought the company was now worth.
4) Let's split the delta evenly between Scott, Todd and Eric, because they are all working on the pivot. For instance, if the pre-money valuation on the next raise was $7M, Scott would own $2M of MBL and Todd and Eric would each own $2.5M.
Key Learning:
ALWAYS HAVE A FRAMEWORK
Most conversations about equity fall apart before they even get started, because there's nothing underpinning the discussion beyond "I want." That's an emotional and completely subjective perspective. Even if one founder is successful in getting more equity, it will breed resentment in the months and years that follow, as other co-founders feel like they got screwed.
A framework creates an objective structure with variables and amounts. Co-founders are able to critique the variables themselves as well as the numbers plugged in without critiquing each other. It moves the conversation from the the value of a person to the value of the work to be done.
Whenever you are allocating, reallocating or (as is sometimes required) clawing back equity, it's vital to start with "here's my objective view of how this business functions and how we're each contributing." There's likely to be some negotiating as the other parties poke and prod and make adjustments. Once you have agreement on the structure, the equity distributions magically pop out the other side.
#startups #founder #equitydistribution