Equity Splits

“Unfortunately, many of our natural inclinations about equity splits are wrong or counterproductive, destined to cause problems in the long run, even when they seem eminently fair, wise, and peaceful in the short run.” — Noam Wasserman, Founder’s Dilemmas, page 145

Transcript

Seventy‑three percent of teams split the equity within a month of founding, right at the beginning. And when you’re splitting when these are still up in the air, not knowing about each other, not knowing about yourself is that a good move? Let’s take look at a team that’s now much more prominent, the Zip Car team. This was a team of prior acquaintances who were coming together to found. Two women who knew each other because their kids shared a day care center. One of them had seen in Europe car sharing, mentioned it to the other. They brought together the idea and started honing and started seeing that oh, this could be something here.

Robin Chase, one of those co‑founders, threw herself fully into the venture. She had heard all sorts of horror stories about what the equity split had done to a bunch of other founders that she knew. And so she was worried about what that equity split negotiation was going to do to her team. And so she decided let’s get it out on the table right at the beginning. Let’s make sure that we’re okay with this. And said we shook across the table, we split it 50/50 and it’s all great. We’ve gotten that out of way now, we can go and conquer the world.

What happened over the next year and a half, Robin became the heart and soul of the venture throwing herself into it full‑time, crafting the business model, all the relationships and partnerships that they needed to work. And her co‑founder didn’t even join, didn’t quit the day job, barely contributing anything to the venture. If we’re Robin how are we feeling?

Usually founding teams would go and focus on the rosy scenario. We’re all on board, we’re all going to be contributing, now what should the equity split be. This is just to give you a little bit of that checklist, what we were talking about before of the situations where you can go right ahead and be part of that 73 percent. If you can go and be assured that you’re not going to have to change your business model or your strategy, that you’re not going to be going through any pivots throughout the life of your venture, if you can be assured that everyone is going to be scaling, they’re going to be able to keep their roles, they’re going to be able to keep contributing at a high level, depending‑‑ no matter whether you have pivoted or not, if you have all sorts of things in terms of commitment and no doubts about it, no personal issues that are going to arise, if you can go and not check off a single one of these boxes go ahead and do the Robin Chase approach. If any one of these things or more is going to be checked off, that’s where you have to think hard about matching those uncertainties with that dynamism that you’re going to have in your agreement.

Suggested Readings

Founders School || Founder’s Dilemmas || Equity Splits || Impact Guide (PDF).

Wasserman, Noam. The Founder’s Dilemma: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton, New Jersey: Princeton University Press, 2012. Chapters 6 and 7.

Wasserman, Noam, and Deepak Malhotra. “Negotiating Equity Splits at UpDown”. Harvard Business School Case 809-020, July 2008. (Revised November 2012.)

Wasserman, Noam, and Yael Braid. “Slicing Pie with a Razor: Ockham Technologies’ Founding Agreements”. Harvard Business School Case 814-017, July 2013.

Wasserman, Noam, and LP Maurice. “Savage Beast (A)”. Harvard Business School Case 809-069, November 2008. (Revised November 2012).

Wasserman, Noam. “Smartix: Swinging for the Fences”. Harvard Business School Case 808-116, January 2008. (Revised December 2012).

Questions for You

What are the uncertainties that might affect my commitment to this startup? My cofounders’ commitment to it?

If we haven’t experienced the most difficult parts of the founding journey yet, how can we tell if any of us will be able to persist through them, or will one of us drop out of the startup at that point? How can we proactively plan for that challenge?

What are my financial expectations? Am I being realistic with myself? Am I being honest with my team about my expectations?

What non-financial rewards am I willing to give up to gain financially, and what non-financial rewards are more important to me?

Tools and exercises

What are you certain about?

What are the uncertainties?

Evaluate: do you expect to change your business model? Pivot? Can everyone scale? Are there any personal uncertainties? Other intervening variables?

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