Founder Equity #84

Jason Kirby
Aug 6, 2024

What's Below in Issue #84:

📰 - How to slice your startup cake

📊 - M&A on the rebound

🎙️ - Podcast #52 w/ David Rotnitzky- successfully selling your business (twice)

🆓 - Free startup resources

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M&A: is it bouncing back this year?

According to Crunchbase, M&A’s path to recovery has been solidly tracking upward as private equity’s share of M&A dealmaking has rebounded.

PE’s slice of total M&A deal value hit 41% in Q2, up from 33.5% in the previous quarter. With banks lending again for leveraged buyouts, this has helped lower borrowing costs, and large take-privates have surged. 

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Splitting the startup cake: equity-wise

Prepare for many cake analogies in this edition (probably not a bad idea to grab a snack before we get stuck in). This week, I'm looking at founder equity: how do you and your co-founders tackle equity split?

Founding a startup is like trying to navigate a maze blindfolded but with more caffeine and fewer bathroom breaks. Of all the critical decisions on this journey, few are as impactful as how we slice the equity cake. You and your co-founders start off wide-eyed and full of dreams, and are faced with the big question – how do we divvy up the equity? Should it be equal shares, or does someone deserve a bigger slice because they bring the secret sauce? 

Equity Splits: What and Why

Equity splits determine who owns what chunk of your fledgling empire. It’s not just about numbers on a cap table; it’s about perceived value, power dynamics, and future earnings. A fair split can keep the peace and drive motivation, while a skewed one can breed resentment and strife. So, how do most startups handle this?

Vesting Schedules: The Must-Have

One method is a vesting schedule as your startup’s safety net. Instead of owning all their shares outright, founders "earn" their equity over time. This means if someone decides to bail early (perhaps they found a new passion in llama farming), the company isn’t left high and dry.

Vesting Schedules: Non-Negotiable

  • Implement for all founders: No exceptions. Every founder should vest their shares.
  • Protects against founder departures: If someone leaves, they only take what they’ve earned, leaving the rest for those still hustling.
  • Maintains VC investability: Investors like seeing vesting schedules – it shows foresight and reduces risk.
  • Common schedules: The standard is 4 years, but there’s a trend towards longer schedules of 5-6 years.

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The data, coming to us from Carta, shows us equity splits are not always equal.

  • 56% of 2-founder teams split unequally: Yes, more than half! So if you were thinking 50/50 is the norm, think again.
  • For 3-5 founder teams, unequal splits are even more common: As the team size grows, the splits often become more complex.
  • Common split among 2-founder teams: A 55/45 split is a frequent choice, indicating a slight but significant difference in perceived contribution.

 

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What you should consider:

  1. Evaluate contributions and roles to determine a fair equity split. Be honest and transparent about each founder’s input and value.
  2. Implement vesting schedules for all founders. Protect your startup and ensure long-term commitment.
  3. Document agreements formally- this one is super obvious but often forgotten. Get everything in writing to avoid any “he said, she said” down the line.
  4. Review periodically. As your startup evolves, so might the roles and contributions. Be prepared to revisit and adjust as needed.

My take: Equity decisions are like the cornerstone of your startup’s foundation. There’s no one-size-fits-all approach to equity splits, but vesting schedules? Those are non-negotiable. By tackling these decisions with transparency, fairness, and a bit of foresight, you set your startup up for success. It’s not just about dividing a pie – it’s about making the cake as big and delicious as possible for everyone involved.

Have the awkward conversations early. Trust me, it’s better than letting tension simmer under the surface. Also, if you go the VC route, you may have to explain the cap table split to future investors, so have the answers ready.

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Dan Rodnitzky's Story: Building Your Business And Successfully Selling It (Twice) 

 Now in Episode 52

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Join me as I sit down with David Rodnitzky, the founder and former CEO of 3Q Digital. He built his company from the ground up, sold it, then in a rare move, bought it back, only to sell it again. David breaks down the challenges and opportunities he encountered during multiple rounds of fundraising and acquisitions, offering real insights into agency growth and M&A transactions.

Check It Out

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Jason Kirby

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