I cofounded a startup that had all of these issues! I was the technical founder along with 2 non-technical founders, they offered me 10% equity to develop a hardware product. Seemed like a good deal, nearly finished my work over 6 months. Then we get into techstars and I have to shut down my independent contractor practice and come on full time with a shitty salary to keep my equity. Also, I had to redesign the product in a way that added several magnitudes more work. Another problem was that one of the non-technical cofounders started calling himself the CTO and started ordering me around on technical issues that I have an education in and over a decade of experience on. After demanding to be an equal partner and CTO, I was kicked out with no equity and no nothing.
I'm sorry man. I was forced out of my first startup last year. It was very traumatic. It's so obvious what you should have done in hindsight but that doesn't help. I wish you the best if luck in the future.
This was a long scam then. Over a year of being gym partners, playing racquetball, drinking, all the stuff you would do with people you consider friends.
A YEAR! MF! That's meant to be long! FTS! A friend is someone you have validate of ten or twenty years of shared adventure. Treat everyone else as a possible friend (and likely tosser).
I'm a day late, but it seems that nobody has answered your question. Here are some things you could have done differently:
- Have a vesting schedule for your equity. This way if things go south, you'll have a certain portion of your equity vested.
- Negotiate a higher equity stake in the first place if you're playing such a founding role. In my opinion, if the product didn't exist before you joined the team, then you're a founder. Remember that we're looking at this with the benefit of hindsight.
- Made the agreement up front that you had control over the technical decisions since you have the expertise to make those decisions.
I should have done these things but I let my guard down. I'm in a city trying to be a new startup city so there was a lot of attention and money thrown at one of the first startups. Everything was given to us, everyone wanted to advise and invest in us. I assumed this community would make sure nobody on this team screws each other because it would look bad. I owned 10% outright but was dazzled by techstars into signing papers that put me on a vesting cliff.
I may not have been considered a real cofounder but I was there at the first brainstorming and had all of the technical ideas. I had a lot more ideas since and am building another team to start the business again. Forced to bootstrap and then move to another city because all the investors here have invested in my original company!
If they fired him, that often renders agreements unenforceable, or at least difficult to enforce outside of rare circumstances. Even in states which otherwise recognize noncompetes, courts tend to be hostile towards companies that try to enforce them against employees where the company themselves terminated the relationship (though not all states are equally hostile).
For example, here is some pretty direct language from the Montana Supreme Court [1]:
We agree that an employer normally lacks a legitimate business interest in a covenant when it chooses to end the employment relationship. [...] An employer needs no covenant to protect its business in these circumstances as the employer sits in the best position to protect itself simply by maintaining the employment relationship.
I've spoken to their lawyer and also got a second opinion. There wasn't a non-compete and both said I could start a similar company as long as I don't use any source code or other work created previously.
This can turn out not to be a problem if the startup hits some reasonable growth (growth is usually a solution to such ails as long as it continues).
This is the important line in the article. Co-founder breakups probably happen more because the startup is not doing well, and not vice versa. I'm not sure if it makes sense to try and optimize for not running into co-founder problems as much as just optimizing for your company's success as normal.
If your company is killing it, and you're a co-founder and you've got 10% and you want to be the CEO and your grad school dropout grace period is ending and you'd rather be working on technical problems, you're most likely going to stick it out regardless.
Almost all startups run into trouble at some point. If you don't have a good relationship with your cofounder because of one the problems, it's unlikely that you'll create a successful startup given the high probably of running into a down period. For example, Facebook had this issue in spite of its huge growth.
Another way of thinking of it is that doing things to maximize success is far more important than what percentage of a hypothetical future success you get: 10% of billions is much better than 50% of millions, which is better than 90% of nothing. So really the percentage only matters insofar as its psychological impact might influence chances of success.
I hadn't thought about that perspective before. It's possible that many co-founders that wouldn't stick together are merely together because of the perceived success. Makes me even more grateful for co-founders that stick around even when things are bad. I don't think you can hack 100% of those situations where things look bad and make them look positive.
I'm actually a little surprised that an equal equity split is apparently the default and preferred option in the valley. It's quite an unspeakable topic in my experience so I'd appreciate if someone could confirm this.
I remember being told explicitly in one startup focused class at MIT that it was highly advisable to decide one way or another who would have the majority of shares. We even played a role playing game where an equal split was the only wrong answer. The idea was that not everyone will be sacrificing and committing equally and that it was better to figure that out upfront than have it play out down the line.
> The idea was that not everyone will be sacrificing and committing equally and that it was better to figure that out upfront than have it play out down the line.
If you think you can figure out ahead of time who will be "less committed" or otherwise less deserving of equity, then either (a) you're fooling yourself, or (b) that person shouldn't be a founder.
I have friends with great skills who I want to work with at my startup, but none who I would really expect "founder" levels of commitment out of.
It seems that they agree: what we both really seem to want is that, after I get the business off the ground on my own, I just hire them for cushy jobs as employees. :)
I'm an advocate of even splits. IMO the logic behind having a dominant founder derives from classic corporate management where you have a boss and a team. I don't see that as a good baseline for a team of founders.
I think I agree. I don't believe a startup can work if the focus is on equity grabbing or if any agreement leaves one founder feeling less committed to the project than the other. A sense of ownership is one of the big motivators that helps you to fall in love and commit to an idea. So if there's something on paper that makes it like the idea is less yours than the other co-founder, I think it will cause less commitment as a result.
Better to own less of successful company than all of nothing.
I think the equity grabbing thing is a bit over rated, although it feels like that if you're starting something and want to get other people on board. Get rational and communicate.
Sometimes it's even funny, at a 2 day hacking/business event, you make something with 6 people, two of these people make 90+% of the product. 2 people just stand by the team the whole time barely contributing and 2 people (business) people, are greatly contributing to strategy.
At the end of the hacking event there is a talk about continuing with the project and starting something up, it is so obvious that it is almost not even brought up. People kinda evade the topic. Then somebody starts to talk about it and everybody quickly agrees that 50/50 split is the obvious fair way to start something.
I don't have to tell you this 'startup' didn't last that long :)
I'm NOT an advocate of even (50/50 or 33/33/33) equity splits precisely because of point #2 (Commitment) in the original article.
Almost every startup I've ever seen or been involved with, there have been different levels of commitment early on, which is OK. If/when things go wrong (which they inevitably do), having a clear leader/decision instead of deadlock, can be the difference between death vs. survival of the company, which is much bigger than the individual founders. These are inherently emotional moments. Even for the departing founder, the survival of the company is almost always a better outcome both in financial and personal impact terms.
That being said, unequal equity positions have historically been misused by business/MBAs against tech founders, esp true 5-10 years ago. This is probably why YC has a strong bias towards equal equity positions.
Edit: For comments talking about the "CEO vs. employee" mindset, if you make your co-founders feel like employees in 2-3 person company, you're a shitty CEO, period. In fact, a good CEO should make early employees feel like true team members (not just the co-founders).
My first startup/business was 33/33/34. The business guy (the closest we had to the CEO) was the 34% and would be the tie breaker if the other cofounder and I disagreed on anything.
Even if you want to do 50/50 split of ownership, can't you structure voting power 51/49 or some other way such that you won't end up in a deadlock?
I've started some things and the 'obvious' way is always to go 50/50, but if you're doing most of the work, thinking etc it's not very motivating to continue. Not all start ups start with everybody quitting their job at the same time.
So yeah I think it's a case to case situation, if you both quit your job, have the same programming and business input then you have an awesome situation and 50/50 is great.
I'm not familiar with VC deals and such but how would something like monthly "stock-like" points work? each member of the team would earn points based on their time commitment for that month (year/week/whatever) and as their commitment or schedule changes, so does their point allocation. For example a cofounder who works fulltime for a year will still have some points/shares even if he leaves. If you recruit someone new then they start at 0 and gain more percents of the company the longer he works there. A persons total percent ownership would then be simply his points divided by the total outstanding number of points. The one downside would be the extra effort required to determine everyone's contributions but this system would allow dynamic allocation of the company ownership over time.
I went thru two breakups. This struck me the most.
You're doing yourself a disservice if you don't bring up what's on your mind. If you feel like you can't, then you should probably question whether you have the right co-founder.
Startups are stressful and not talking about founder issue early up would only make it worse and slow you down even more.
If anyone needs someone to chat about founder issues, feel free to reach me from my HN profile.
A must read article ... I've seen instances of each, but didn't really recognize them at the time (I'm also sure I haven't seen as many as Harj). I think I'll be more aware now.
One little nag - It might not be a great time to use the analogy of an exploding pressure cooker.
ALL these tensions exist in a startup. In the 3 I have been in, all these issues arose to varying degrees. In my second we went to the coffee shop on Monday morning and talked really openly about what we thought of last week. It was great. We were positive and honest people but nearly all issues including a serious equity issue were dealt with. It is you v. the world so treating you cofounder with suspicion is dangerous.
This is a spot-on post. I just recently broke up with a co-founder, mostly because of the uneven equity split like you stated (i.e. I was doing far more work and contributing far more expertise than what my equity showed). It was also due to a number of other factors, but that was primary. You hit the nail on the head with this. Great post.
I think doing proper personal due diligence up front can often help you avoid a breakup; it can also help avoid starting a company together in the first place if the fit isn't there, and make breakups easier should they happen.
I wrote a blog post about my own experience doing this with the co-founders of Otelic. We have since lost one co-founder in a completely undramatic way - which I largely attribute to talking everything through in great detail prior to starting. Many times you're so excited about working together on a cool product that you neglect to do this; it's happened to me before and it's a costly mistake to make.
A good co-founding relationship has much in common with a good marriage. Think of the output as being a happy family life. You can create that all by yourself, by adopting one or more children as a single parent. But it'll most likely be a lot harder than if you find a good partner.
I don't buy this. I'm not sure I'll do a good job at explaining why not, but it's more of a hunch than anything.
The reason I don't buy it is because two average people can get married and have a happy family life simply by cooperating. Cooperating is not enough to succeed with a startup, they must also have a good enough idea, good execution of the idea, and some luck. Often nothing short of brilliant execution of the idea will make a startup work. And they probably need exceptional people, not average people.
Another thing is that a happy startup life, most of the time, is unsustainable. People at the startup can be happy and get along with each other right until they run out of funding. I've watched it happen. They often still get along after they've stopped working on it, but the startup has failed.
You know what my opinion was always that finding competent, smart, interesting and passionate people are impossible to find, at least around me. I have just gotten use to completely relying on myself.
In a lot of ways other people can negatively impact your creative process by being a distraction. But at the same time, if you find someone where you can happily communicate with then maybe the ideas can pour out.
The obvious counter is all the other hurdles that penalize a single founder.
That said, I think being a single founder is a little underrated these days. Especially if you make an effort to address the known weak points of being one.
These are excellent observations. I think one of the big challenges, though, is that seeing these issues coming can be very challenging. Subtle commitment or personal priorities issues can lurk under the radar and only come up when the going gets rough. I think the last point, regarding candor, is super critical for this reason; if your team is transparent about everything, then there's a good chance you'll realize things aren't right before things explode.
This is helpful. We were fine with even equity splits or a slight difference because one cofounder is funding the venture. Sounds like even is preferred?
Does the co-founder term always imply some sort of equality? If so, I think the implication is dangerous. For example, finding someone who works exactly as hard as you do is impossible, so someone's always going to be disappointed.
Also, the buck has to stop somewhere, at an individual, not a committee. It's lonely at the top.
I've generally found that the best case is the buck stopping at a smallish committee (2-4 people) who work well together, take joint responsibility, and appropriately communicate and split expertise. Individuals have a lot of blind spots and tend to get either overwhelmed or overconfident. But it's also true that the "work well together" part has a high failure rate.
Nice post. You give an example of un-even equity split when one founder had the idea, built the first site and got some traction. When do you stop being a co-founder and become a founding employee instead?
