How do you allocate equity between co-founders?

The simplest way to go about splitting equity among co-founders is to just do an equal allocation. Two founders, 50/50 split, four founders, 25/25/25/25 split and so on. In fact, equal or close to equal equity splits among founding teams are quite standard in most cases where a group of friends decides to jointly launch a startup and each of them has a specific role within this new venture. Each has an equal stake in the game, each has equal responsibilities.

This is not as straightforward in cases where, for example, the core idea for a new venture comes from a single person, who then is joined in their journey by others who will contribute to making this idea possible. Or in cases where one of the founders is committed full time on the startup, or has contributed financially towards its creation, whereas the other founders are not as committed.

All in all, discussion on the split of equity should take place early on in a startup’s life and founders should make sure that everybody is happy with the final split. Here are some ways the split can be calculated, in case the founders decide not to go with an equal share in the new company. These also work in cases where additional co-founders are added to the cap table at a later date (not including investors).

1. Split based on value generated

This sounds simpler than it is. The idea is that the value of the contribution of each co-founder is calculated and then divided by the total company value.

The tricky part here of course is the calculation of the value. To make things easier, you can split the value into monetary contrinution and time commitment. Monetary contribution is easy to measure. It is the sum of money invested by each co-founder in the business. The time commitment can be calculated as Total time commitment x Rate.

The value equation would then look like this:

Founders’ value = Monetary contribution + Time-based contribution

Obviously, a pre-requisite for this equation to work, is for an actual rate to be decided among co-founders. In order not to complicate matters further, the best choice would be to have one common rate among the whole team.

In case this framework is followed, then the equation for calculating the equity of each founder would look like this:

Founder % = Founder value / Company value

where company value is the sum of the founders’ value.

2. The founders’ pie calculator

Similarly to the above, this method takes into account the value generated by founders, but on a more qualitative basis which is logical and fair. This method works with a pre-defined set of contribution areas i.e. idea, business plan preparation, commitment and risk, domain expertise and responsibilities. Since each company is different, the importance of these areas can vary substantially; therefore, a weight is assigned on each area, based on their relative importance. Following this, the contribution of each founder on each of these areas is evaluated, on a scale from 0–10 and this value is multiplied by the weighted value of each area, so that each founder is assigned a score in the form of points, on their contribution for each of the aforementioned areas. Adding the points of all founders results on the total value. The equity percentages for each founder are then calculated as follows:

Founder’s equity = (Founder’s points / Total company points) x 100

The above method is called the ‘Founder’s Pie Calculator’. It was first described in an article by Frank Demmler, who is an Adjunct Teaching Professor of Entrepreneurship at Carnegie Mellon University. You can read more about this method here.

3. Automated tools

If the above seem compicated, there are a number of online tools that will do the work for you.

• One such tools is provided by https://foundrs.com/ and it’s a very nice solution in the form of a questionnaire that results in an automatic split based on the replies provided.
• Another online tool is https://slicingpie.com/ , which claims to be the only co-founder equity calculator you will ever need. It is based on what people actually do during the bootstrapping stage of a company’s lifecycle and is designed specifically to accommodate changes over time so that it stays fair.

Of course, there are other options available, but whatever you decide to go with, you should make sure that you try to split as equally and fairly as possible and that everybody is in agreement with the chosen methodology. After all, your co-founders are the people you depend on to make your startup successful!