Should you split ownership 50-50 with your partner?
A great many founders that come to me for representation want to split ownership 50-50 with their co-founders. I’ve been thinking about 50-50 issues a lot lately. These situations present interesting challenges for the attorney, in terms of how to construct reasonable, practical mechanisms for dealing with disputes that can take place between the founders, which otherwise can result in deadlock.
Before sharing some thought on that issue, I first want to explore the question, should founders even do this at all? This is a question that has always aroused significant debate in entrepreneurial circles, and I am sure it always will.
A definitive “no” comes from Silicon Valley entrepreneur and VC Mark Suster. His posts (one here) are very much worth reading in their entirety. To summarize, he want to debunk what he sees as “co-founder mythology,” the conventional wisdom that says that it is a good idea for founders to take on equal co-founders. His main points:
First and foremost, you don’t need a co-founder. You’re just looking for one because you are afraid to take the leap on your own.
A great deal can go wrong in equal partnerships, especially those formed hastily.
People change. Even if a person is a compatible, complimentary partner today, it’s hard to know what they (and you) will be like in 6 months, 2 years, etc.
When problems arise, it is very likely to be after you have put in an enormous amount of blood, sweat and tears.
Suster’s advice is to bring on that co-founder – as an employee. Treat them like a partner: give them a big hunk of equity if they are worth it, share confidential information, consult with them on important decisions. But if there are disagreements, you get to make the decisions.
A common view in support of equal partnerships, which I’ve seen places such as the Y Combinator discussion boards, is “If you have to depend on a shareholder vote to decide things, you’re already dead.” Or, put otherwise, if splitting ownership with your partner is an issue, then you’ve got the wrong partner.
The fact is, many founders go into business with a partner that they truly view as equal, and essential to the success of their venture. Equal division of ownership signals mutual trust and respect, and encourages the founders to maintain a constructive relationship and to work out any disagreements that may arise.
When co-founder equity is lopsided, it can brew bad feelings and resentments, which poison the co-founder relationship – and by extension, the company. Teamwork and passion are the lifeblood of startups, and anything that would undermine these hurts a new venture’s chances for success.
When I started my own business, my partner and I structured ownership so that the two of us had to agree on all significant decisions. I felt that as a first-time entrepreneur, I needed the ideas, support and energy of a co-founder and someone with whom I could share the stresses and burdens that accompany starting a business. (I appreciate Suster’s contrary view on this, but I just couldn’t see making the business happen alone.) And honestly, even though the idea for the business originated with me, I don’t think it ever occurred to me to split ownership other than 50-50. I realized that my work in developing the idea early on, though valuable, meant little compared to the work that lay ahead. And my partner was a friend (a subject for a different post), for whom I had a great deal of respect. I felt that we had to move forward on the basis of trust and agreement.
For the most part, this decision worked for my partner and me. If I had to do it again, I would do it the same way. But every situation, and each pair of potential founders, is unique.
Ultimately, both points of view are legitimate. Undoubtedly, many equal partnerships work and many don’t. The same, however, can be said of many majority/minority partnerships. In other words, there are a lot of factors that go into whether a partnership is successful, and the equity split is just one of them.
Heading into business with a co-founder should not be undertaken lightly. This is true regardless of the ownership split. Before embarking on any type of partnership, you should give careful consideration to whether your goals are aligned with your partner, your skills are complimentary, and your personal styles and temperaments are compatible. Be honest with yourself: are you the typeof person who can compromise your own opinions for the sake of the relationship? Because make no mistake, it is a relationship. It’s like a marriage. And like getting married, it’s something you should think about very carefully.
What do you think? Please share your perspective in the comments.
Whatever you opinion of it, equal division of ownership is quite common. In my next post, I’ll discuss some legal provisions to consider for those who want to share ownership equally with their partners.
Categorised as: Startup Stuff