Splitting a Company Between Co-founders: How to do it the Right way
It is very rare to find startups with only one founder. Most have two or three and some have even more. There is a simple reason why you may need co-founders. You may specialize in technology, but you also need business skills to succeed. Money is another factor. A co-founder can bring these skills in.
The most common question here is how do you split a company between co-founders or how much do you give to someone who has just come in as a co-founder? A salary may not cut it, then you will not get the passion that you want.
By default, most founders split the company equally between themselves, but that is not a good idea because then nobody will be in control. There should be a proper leader in a startup. Here is another reality check; just because you started the company, it does not mean that you get to keep 90 percent of it. A startup is valued based on the tangible results that it delivers and ideas by themselves do not have any value.
Start the discussion by analyzing who will do the work, provide funding or deliver results. The stake a co-founder gets in a company will depend on the value that be brings into the company. Here are some variables.
The co-founder had an important role in another startup
Starting and developing a new business is different than playing executive roles in mature companies. People who have come from these background may be a liability in a startup. On the other hand, there is value in problem solving abilities, negotiation skills and building & executing a business with minimal funds.
Connections and experience in business
Academic degrees and textbook knowledge are not so important in startups as product depth and breadth and connections with potential customers, thought leaders and key vendors. Often building a product is easier than the stuff that comes after it.
Time allocated to the business and responsibility level
A co-founder works part time, carries responsibility and gets income from elsewhere. Such co-founders have lesser risk that others who work full time or who have greater operational responsibility in the startup. Generally, if a co-founder is less dependent on the startup’s success or if he/she is getting a higher cash compensation, then his/her equity is also lesser.
Amount of venture funding that has come into your company
An investor may not be called a co-founder but he will get equity, commensurate with how much money he has put into your company. Make sure your equity level is above fifty percent or you risk losing control of your company.
These decisions are not easy to make – they are emotional and they will have long term repercussions. If you are smart, you will get some legal advice. Draw up an agreement document and get it signed by the co-founders. You can always amend it later, as roles become more clear and you get your company on the road. It is also a good idea, to vest the founder’s equity after a period of time or at least on a monthly basis. Note that if you get in angel investors or venture funds at a later stage, all co-founders will have their equity diluted. Make sure that it is happens equitably and in an even manner. You do not want to become that co-founder who gets pushed out of his own company.