One thing I find myself discussing with entrepreneurs all the time is on the topic of how to distribute equity amongst founders and employees. How to share the total number of shares amongst those working full-time in the company.
Ideally, a company would have all co-founders in place on the day the company is founded, and this group of people agree on how to compensate future hires that will be brought in as the company scales.
Unfortunately, this scenario is closer to utopia than reality. In reality, a company is started, an additional co-founder is brought in after a few months, another co-founder quits sometime after that, you recruit a super-senior executive that demands 5x the equity other early hires have been offered and so on. Reality is messy.
I rarely see companies that continuously update how they split equity amongst founders and employees. Both because this would require a lot of resources, and because it is nicely placed in the not-urgent/important quadrant of the “Eisenhower matrix”. Often, the process of redestributing shares is postponed too long - and this leads to more conflict than necessary.
What usually happens then is that people gather in a room and start throwing out numbers; “I deserve X%”, “I should have Y%” and so on. I read somewhere (can’t retrace it now) that if you ask all employees to rate their contribution to a company in percentages, the sum is closer to 300% than 100%. It goes without saying that these discussions rarely end with all smiles.
To mitigate the risk of such a discussion ending up destroying morale, I would recommend a different approach: start by establishing a framework for how equity should be distributed. This framework should consist of different principles that everyone agrees on, that will be used to guide the discussion around numbers that will follow. Which principples to include might differ, but I would at least include the following:
Step 1 > Step 10 > Step 100: All else equal, the earlier you join, the more equity you should have. You take more risk if you start the company versurs if you join post first funding versus if the company has raised big VC.
Building a company takes time: In some ways opposite to the first principle; acknowledge that the company is built over time - the idea in itself is worthless. Even though you don’t join first, you can still be instrumental in making the company turn into something of significance. And if you don’t; vesting schedules will make sure the company’s best interest is taken into account.
Uniqueness: People with skillsets that are unique and crucial for the company to succeed should get more equity than regular “employees”. Differentiate between those who act like owners and those who act like employees. Caveat; people who join early are likely to get a skillset which become unique and crucial over time as they own culture and deep know-how of a lot of stuff. If you plan on keeping people for the long-term expect them to become unique and crucial and distribute equity accordingly.
Presedence: What are the implications of anchoring on a certain number of shares early on. Not all employees nor co-founders care that much about ownership early on, and it might be tempting to be less generous because of this. This might come back to bite you because you might want to bring in people later on that care about equity and want a certain percentage, but where you’ll have difficulties offering this just because it’ll be unfair compared to former hires/co-founders.
Risk profile: There should be an inverse correlation between salary and equity. If you’re paid market, you should expect fewer shares than if you take a 50% pay-cut compared to what you’d be paid in a corporate job.
These five* “principles” are things I would discuss before entering into a discussion about numbers. If everyone agrees on the principles, you have a better “vocabulary” to bring into a discussion on specific numbers. And it’ll increase the probability of success.
- There might be others as well - if I come to think of any I’ll make sure to add them.