One of the most confusing aspects of starting up a company that might someday be worth a lot is how to divide up the shares. This issue starts with co-founders but can quickly extend to include employees, boards of directors and boards of advisors, and important contributors trading services for equity as a bootstrapping strategy to conserve cash.
Lots has been written on the topic, especially focused on venture capital funded startups. However, there are other useful resources relevant for other types of companies as well. The following is a short annotated list. Unfortunately this will not overcome the confusion as there are many strong and different opinions on how to split equity.
General Equity Compensation Resources
The National Center for Employee Ownership is a non-profit association that “provides practical resources and objective, reliable information on employee stock ownership plans (ESOPs), equity compensation plans, and ownership culture.” It has published many free articles on a wide variety of topics, including ESOPs, equity in LLCs, phantom stock, and more.
The Open Guide to Equity Compensation sits over on Github. It is extremely comprehensive yet concisely written. It’s focused on C corporations on the venture capital path.
Over time employee stock plans become an administrative issue, so it’s not surprising that there are software companies with management tools. Certent has 2400+ customers including both large and small firms. Their opt-in White Paper on Best Practices in Stock Plan Operations has useful survey data for companies that already have a plan and need better execution.
Slicing Pie is a method developed by a professor at Northwestern University that’s been used by a variety of companies, including more Mainstreet types of businesses, for about a decade. The methodology includes co-founder equity splits but includes family and friends investors, consultants, advisors, even landlords. You can learn a lot for free, but the book and software are recommended for implementation.
Co-Founder Equity Resources
The Gust Co-founder Equity Split tool is free, and takes a very different approach from Slicing Pie. Where Slicing Pie focuses on market value of compensation, Gust focuses on skills and contributions. As such, Slicing Pie can help with a variety of contributions – time, equipment, discounts, ideas – while Gust focuses on co-founders in very high potential companies.
Another approach similar to Gust is the free Startup Equity Calculator that asks just 15 questions about up to 4 co-founders. It is very focused on software based startups.
A tech company founder who did lots of research on the topic of co-founder equity wrote this post including a link to his Excel spreadsheet calculator. It uses five different methodologies based on his research, and the spreadsheet provides a calculation for each and an average of the five.
On the other hand, this Y Combinator blog post by Michael Seibel, CEO of YC, argues for simple, equal splitting of founder equity with 4 year vesting.