Calculating founder equity

Co-founders are always struggling to determine the “right” equity split. In my view, it is a question with no “right” answer. Like much else in business, it’s about negotiation and bargaining power, and also about relationships, entrepreneurial style, and other factors.

Still, entrepreneurs often being software geeks, it was inevitable that someone would try to make art into science. Here’s an admirable, though in my view ultimately flawed, example of an effort to quantify how much equity each founder should receive, based on objective criteria.

Chicago-based entrepreneur Mike Moyer has also brought to my attention his version of a “dynamic” model for quantifying founder equity, which he lays out in a book called “Slicing Pie.” Here’s a video introduction to how his approach works. Mike was kind enough to send me an excerpt, which I look forward to reading in the near future.

I have no problem with any of these approaches, if people find them helpful. I do have reservations about spending too much mental energy up front on this, since an entrepreneur’s time is quite limited and there are other important issues to deal with. (If you don’t build a viable business, the equity split is meaningless.) Any approach to splitting founder equity needs to be practical from a legal perspective, i.e., must be simple enough to document, not create tax problems, etc. But the important thing is to get to a split that feels right for everyone, and then quickly move on.

Categorised as: Capital Structure, Startup Stuff

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