For founders, deciding how to split equity with co-founders is not always a straightforward conversation. The number of founders depends on what each individual brings to the table and how they will influence the longevity and success of the company. Carta’s Director of Insights Peter Walker, shares findings from the company’s rich data set on founder equity splits and current trends in pre-seed fundraising rounds Peter and his team are dedicated to making venture capital less opaque by sharing out key data insights from across the startup ecosystem.
This guide highlights Peter’s key questions for deciding how to build your founding team, divide up equity, and raise your first round of funding.
The state of founder equity
Carta’s Insights team deciphered the state of founder equity division by studying the data from 18,000 founders, across 8,000 startups actively using Carta software for their captables.
Only 26% of companies have solo founders. The sweet spot is two co-founders at 36% of polling
The average size of a founding team depends on the industry. For example, hardware and electronics tend towards larger founding teams, and 60% of pharmaceutical companies have 3+ founders. On the other end of the spectrum, ad tech and software companies rank highest for solo-founders.
Find your missing pieces
How many founders will you need to complete your founding team? Carta defines a founder as someone who has:
- A total ownership stake of over 5%
- Shares issued before the first financing round
- Shares that were among the first five securities issued
- Shares that have not been transferred, purchased, or converted
Aside from your industry, the size of your founding team will depend on various factors, including what skill sets you need in order to supplement your own.
Do you need someone with fundraising experience, or an engineer to head up the technical vision? Do you need a marketing genius, or a subject matter expert in your field?
Understand your own critical competencies and blind spots so you can discern which gaps you need to fill to form a founding team with a variety of backgrounds, strengths, and realms of expertise.
Have hard conversations
Most would assume that an equal equity split leads to the best outcomes. But in effect, equal splits are rarely seen.
In companies with two founders, 41% split equity equally. As founding teams get bigger, differences in equity allotment grow — only 3% of five-person founding teams split their equity equally.
Every startup will typically have a lead founder, the person who had the initial idea and may likely become the CEO. This founder often receives a larger portion of equity than the rest of the founding team.
But startups are about execution, not ideas.
Ideas are just the first chapter of the founder journey, and having an idea does not always warrant a larger slice of the pie. Here are some poor reasons founders will structure an unequal equity split:
- I started working x months before my co-founder.
- My co-founder took a salary for x months and I didn’t.
- I started working full time x months before my co-founder.
- I am older or more experienced than my co-founder.
- I brought on my co-founder after raising x thousand dollars.
- I brought on my co-founder after launching my MVP.
With a long view of your company, a lot of the reasoning above becomes irrelevant. Ten years in, will it matter if one person was there three months longer than the other, or came on after the first $100,000 was raised?
Plan on your company taking a decade to build, and work backwards from there.
Slicing Pie has an online equity calculator but Peter recommends taking the time to evaluate your split with your founding team and land on what makes the most sense to you.
Here are some rationale that are good reasons to split co-founder equity unevenly.
- I started working full time x years before my co-founder
- I invested a substantial amount of my own personal capital into the business
- I have a clear ability to fundraise that others don’t
Conversations about founding team equity are not the easiest to have, but they are integral to ensure that everyone is compensated appropriately according to what they bring — and will bring — to the table in the longer term.
Wait for it
While it may seem counterintuitive, everyone needs a vesting schedule, even lead and solo founders. Vesting schedules keep founders bought in and working in unison towards a shared vision. They also help you avoid situations where someone leaves unexpectedly after six months with their entire founding package in tow. Companies can fall apart because founders didn’t have a vesting schedule. Safeguards like these protect against the unknown and keep interests aligned.
The typical vesting schedule is a one-year cliff and a four-year vesting period, but this can vary company to company, and role to role.
For example, advisors may have an equity vesting schedule based on performance rather than time. Since their value is typically realized within a year, this makes more sense than a time-based cliff. For example, you can set a cliff based on the number of introductions they make to investors, or how many executive candidates they bring you.
In addition to protecting your shares, you have to protect your board. Not everyone on your founding team needs a board seat. You can always add people to your board, or issue more shares, but reversing these actions is much, much harder.
Especially if you have a larger founding team, avoid putting too many people on your board right away. You want to leave seats open so you can fill them at crucial moments with the expertise you need to work past novel problems as your company scales.
Once you’ve decided on your founding team, your equity split, and your vesting schedule, you can look towards raising your pre-seed round with SAFEs: Simple Agreements for Future Equity.
SAFEs are convertible financing instruments where a founder gives up the right to future equity in return for capital today. SAFEs, unlike convertible notes, are not debt. The SAFE actually converts into equity when the founder raises a priced round, regardless of whether that price round hits the valuation cap or not. Carta has a SAFE and convertible note calculator that you can access here.
40% of companies that raise a SAFE round end up raising a second SAFE round before going out and raising their seed. According to Carta’s data, the average size of a SAFE round is $770,000 and the median is $300,000.
SAFEs are effective, impactful ways to raise money to fund an MVP or get you to your first institutional round — so long as you understand that they dilute your ownership as a founder.
Build the muscle
All of the conversations above — from finalizing your founding team’s compensation to raising your first round of funding — are not one and done. You will have these conversations multiple times throughout your founder journey, and that’s a good thing: revisiting these questions as your company grows and changes is essential to ensure that everyone on your founding team is aligned and content.