Negotiating equity for self-funded startups
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Today’s question comes from Bernard. I found a co-founder who has hinted that a 60/40 equity split works for him. However, I will be self-funding the startup and I’m not sure that equity split covers my costs. How should I proceed?
As I’ve said before, a 50/50 split is often not a good idea for co-founders. In Bernard’s situation, it’s important that he has an actual number he plans to put into the business before he begins negotiating with his co-founder. That number will allow you to have solid ground to stand on when deciding how much equity you should both get.
What is the money going to be used for?
Are you going to be paying the co-founder a salary? If so, then that split is not fair because you won’t be taking a paycheck and you’ll be paying your co-founder, so you should have a more substantial piece of equity. If you aren’t planning to pay your co-founder, then that changes things a bit.
How to split equity
The fairest way to split the equity is to think about what each of you is doing. If they are a technical co-founder and the number of hours he’s going to be working equates to how much money you are putting into the company, then all things are equal.
You have to also think about other things such as, whose idea it was, who is handling the day-to-day operations, customer support, etc. If your co-founder isn’t doing any of that, then that gives you leverage in the negotiation. If you are putting in cash and doing all of the other work, too (besides building the product), then you should own more of the company.
Regardless of what you determine is your fair number, you should go in higher so that you have some room to negotiate. Remember, you can always put a plan in place that increases their equity as they take more responsibilities off of your plate as the startup matures. It’s also important that you don’t tie their equity to someone else’s goal because that can get frustrating for any employee or co-founder.
“You have to be comfortable negotiating equity with your potential co-founder because negotiating is something you’ll be doing for the lifetime of your startup.”
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