Joel's Totally Fair Method to Divide Up The Ownership of Any Startup https://gist.github.com/isaacsanders/1653078
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.
Each layer is approximately one year long.
You don't have to follow this exact formula but the basic idea is that you set up "stripes" of seniority, where the top stripe took the most risk and the bottom stripe took the least, and each "stripe" shares an equal number of shares, which magically gives employees more shares for joining early.
However you organize the stripes, it should be simple and clear and easy to understand and not prone to arguments.
NOTE: You can reserve a whole stripe for the fancy CEO that you recruited who insisted on owning 10%.
The top layer is the first founder or founders. There may be 1, 2, 3, or more of you, but you all start working about the same time, and you all take the same risk... quitting your jobs to go work for a new and unproven company.
Two founders start the company. They each take 2,500 shares. There are 5,000 shares outstanding, so each founder owns half.
The second layer is the first real employees. By the time you hire this layer, you've got cash coming in from somewhere (investors or customers--doesn't matter). These people didn't take as much risk because they got a salary from day one, and honestly, they didn't start the company, they joined it as a job.
They hire four employees in year one. These four employees each take 250 shares. There are 6,000 shares outstanding.
The third layer are later employees. By the time they joined the company, it was going pretty well.
They hire another 20 employees in year two. Each one takes 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we're giving each layer 1,000 shares to divide up.
By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. There might be two founders, five early employees in layer 2, 25 employees in layer 3, and 200 employees in layer 4. The later layers took less risk.
By the time the company has six layers, you have given out 10,000 shares. Each founder ends up owning 25%. Each employee layer owns 10% collectively. The earliest employees who took the most risk own the most shares.
You must have vesting. Preferably 4 or 5 years.
Nobody earns their shares until they've stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month.
Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting.
This is an extremely common mistake and it's terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there's some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Investments just dilute everyone.
Ex. We're two founders, we gave ourselves 2,500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2,500 shares. So you make another 2,500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's all there is to it.
Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc.
That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because "it was my idea," or because "I was more experienced" or anything else.
Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, "to heck with it, we can NEVER figure out what the correct split is, so let's just be pals and go 50-50," you'll stay friends and the company will survive.
The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the answer is simple: the investment just dilutes everyone.
Using the example from above... we're two founders, we gave ourselves 2500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2500 shares. So you make another 2500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's all there is to it.
A lot of times you have one founder who has a little bit of money saved up, so she decides to go without a salary for a while, while the other founder, who needs the money, takes a salary.
It is tempting just to give the founder who went without pay more shares to make up for it. The trouble is that you can never figure out the right amount of shares to give. This is just going to cause conflicts.
Don't resolve these problems with shares. Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU. Later, when you have money, you'll pay them back in cash.
In a few years when the money comes rolling in, or even after the first VC investment, you can pay back each founder so that each founder has taken exactly the same amount of salary from the company.
No. Ideas are pretty much worthless. It is not worth the arguments it would cause to pay someone in equity for an idea.
If one of you had the idea but you both quit your jobs and started working at the same time, you should both get the same amount of equity.
Working on the company is what causes value, not thinking up some crazy invention in the shower.
Then they're not a founder. In my book nobody who is not working full time counts as a founder. Anyone who holds on to their day job gets a salary or IOUs, but not equity.
If they hang onto that day job until the VC puts in funding and then comes to work for the company full time, they didn't take nearly as much risk and they deserve to receive equity along with the first layer of employees.
What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company?
Great. Pay for that in cash or IOUs, not shares.
Figure out the right price for that computer they brought with them, or their clever word-processing patent, and give them an IOU to be paid off when you're doing well.
Trying to buy things with equity at this early stage just creates inequality, arguments, and unfairness.
That depends on market conditions. Realistically, if the investors end up owning more than 50%, the founders are going to feel like sharecroppers and lose motivation, so good investors don't get greedy that way.
If the company can bootstrap without investors, the founders and employees might end up owning 100% of the company. Interestingly enough, the pressure is pretty strong to keep things balanced between investors and founders/employees;
an old rule of thumb was that at IPO time (when you had hired all the employees and raised as much money as you were going to raise) the investors would have 50% and the founders/employees would have 50%, but with hot Internet companies in 2011, investors may end up owning a lot less than 50%.