What makes a founding team more likely to split equity equally?
In this year’s Entrepreneurship and Compensation Survey, I added questions about equity splits within the founding team. These questions were sparked by my cases and field research about equity splits, which indicated that:
- there might be systematic patterns to which teams split the equity equally vs. unequally, and
- how the equity is split might affect the stability of the founding team over the first couple of years of venture existence.
This is the first in a series of posts presenting the results of quantitative analyses of my 2006 equity-split data. This post will delve into #1 above, the factors that lead teams to split equity equally vs. unequally. Future posts will present the results for #2 above, along with some interpretations of the results.
As always with these initial results, please post comments with your thoughts, reflections, and experiences, so that we can make sure that the analyses — and the paper that will be based on them — address the broadest and most relevant set of critical issues, and that we can identify where the patterns shown here either are consistent with or conflict with your experiences.
The data include 998 founders from 326 multi-founder technology ventures.
The factors that had significant effects (at the p<.05 level or better) on whether the team split the equity equally were:
- Team size
- Differences within the team regarding years of prior work experience
- Differences within the team regarding amount of capital invested at founding
- The timing of the split
- The market context at time of founding
The table below summarizes how these factors tended to increase versus decrease the chances that the equity would be split equally.
Interestingly, the prior relationships among the founders (friends vs. co-workers vs. strangers) did not have any significant effects on the equality of the split in either direction, either because they are non-factors, or because they include conflicting effects that largely cancel each other out.
Please post thoughts or observations on any of these factors, results, or other things you think affect equity splits!
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one interesting factor might be whether one person had “the idea” or both/all evolved the idea with no one clear originator.
Anonymous:Thanks for the thought — quite an important factor, indeed! Also, quite a hard one to figure out objectively. I’ve tried 2 approaches so far, but would love to hear everyone’s thoughts on other approaches that might work.First, in the IT dataset that produced the results described in my post, I examined the <><>initial positions<><> taken by the founders to see if a single founder took the “CEO” position (as opposed to either having no CEO or having multiple co-CEOs) to see if having a single person at the top of the pyramid had a significant effect on the equity split (surprisingly, it didn’t). One interpretation might be that, all other things being equal, the “idea person” would be more likely to take the CEO position, and therefore the existence of a single CEO might be an indicator of there being a single idea person.The second approach, which I think is much more tied to actual “idea generation,” is specific to the Life Sciences dataset I collected in parallel with the IT one. In the Life Sciences survey, I asked whether each founder brought with him/her a <><>patent that formed the basis<><> for founding the venture. When I crunch the equity-split data for the Life Sciences dataset, I’ll make sure to include it, and will post to the blog any interesting results that come out of it.Within the cases I’ve written or am writing (e.g., “Ockham,” “Wily,” “Comet,” “Rubbish Boys”), it’s relatively easy to untangle the origin of the idea (though across those cases, having a single idea person has not consistently affected the equity split). Across the hundreds of companies in my quantitative analyses, it’s been much tougher. Love to hear any other thoughts on how better to untangle it across those quant analyses!
I agree with the conclusions of your research. One of the things that seems to drive uneven equity splits is a large spread in some area, either capital or experiance. I was wondering if there is a threshold where these differences take on added importance. I think an example might make this a little clearer. If I have 5 years of experiance and my partner has 4 years of experiance, the one-year will probably not lead to a huge difference in equity, because it can be easily argued that you have similiar amounts of experiance, similiar enough that they might as well be equal. If the difference is 25 years of experiance to 4 years of experiance, almost no-one could argue that the experiance level is simliar. Is there any point at which the difference in experiance or capital suddenly takes on an even stronger effect? Maybe there are interesting results if you look at absolute differences, like 10 years? or in percent differences, like twice as much?
Those would indeed be very interesting patterns, Janak! I’ll test those threshold effects when I revisit the quantitative models.
Very interesting research indeed.An interesting variable would be a <>variability in the type<> of their work experience. Basically it would represent whether the founders all came from the same industry/sector or not.Additionally, it might be interesting to see whether co-founders’ experience in the respective sector of the startup is valued at a premium (reflected in greater equity percentage) as opposed to someone who was previously in another industry (e.g. consulting, investment banking…)
I always have to wonder about these types of surveys. Is it akin to doctors treating symptoms instead of diseases? I’ve got a VC backed startup - renewable energy, not tech - with four founders whose professional experience ranges from 4 years to 15 years. Education levels range from BS to one with two Masters. The ‘idea person’ is the CEO (that’s me), the rest fit into niches based on their skillsets. CFO, Ops, Engineering. I’m the only one who has put $ into it prior to VC backing.We split equally for several reasons: We’re all starting from the beginning, we’re all taking the same risk, we’re a team, if we’re successful we’ll all ‘get enough’ without trying to jockey for equity position this early in the game, jockeying for position this early in the game does nothing for the effectiveness of teamwork.The startups I’ve participated in with widely disparate equity splits always ended up getting entangled in ego-driven politics, etc. Doesn’t mean they failed - but it adds friction.Here’s a kicker: Talking with my VCs over coffee, they told me the reason they ultimately went with my group was because we were splitting the equity equally. They said it told them we were more concerned with the success of the enterprise than our own personal wealth accumulation - that we had the presence of mind to realize the success of the first would ensure the latter.So if I’d been greedier and said, “I get 50% of owner’s stake, you guys split the rest”, I might not have funding at all right now and then where would I be? Big piece of a really small pie.
Thanks for sharing your views, Anonymous — you very eloquently capture the arguments made by believers in the power of equal splits. There are a lot of issues you raise that deserve comment, and I look forward to hearing further from you about them.First, regarding your opening statement: I’m not sure what you’re referring to as the “symptoms” versus the “disease,” but would welcome hearing more about it. If it’s referring to the focus of this post on an interim/”symptom” outcome (whether the team splits equally) rather than a final outcome (e.g., whether the team stays together in the long-run, or even whether the venture has a valuable exit), then you might want to check out < HREF="http://founderresearch.blogspot.com/2006/12/equity-split-results-part-2.html" REL="nofollow">the follow-up post to this one<>. (I also have a fuller academic paper in process that has much richer analyses of both the “symptoms” and the “disease.”)Regarding your split, there are two kinds of equal splits. By far the more problematic one is the “easy handshake,” wherein the founders lack conscious consideration of whether an equal split is a good one. The better type is what yours seems to be, where the core founder does give it some thought and still decides to split equally. Problems still tend to arise in that case, but you’ve hopefully set yourself up to avoid them.One of the ways to avoid those problems is to find a VC who’s on board with how you split things. VCs are usually keen on having each person’s equity stake be in line with their expected future contributions, and your VC seems to be in sync with the current split. (It’s interesting to hear about the heterogeneous backgrounds within your team, which would seem to make it less likely that everyone will be contributing relatively equally.)To cite just one problem that comes up regularly, what if one of your co-founders felt the need to leave the team (e.g., because of an unexpected change in family situation) and kept all of his (equal-share) equity while not contributing anything more? Would you be okay with that, in the midst of your long hours of work to build the venture while owning the same amount as your ex-cofounder? At its core, you — the central player, CEO, and idea person — are the one most likely to have feelings of regret from the equal split, so you are a key to holding things together if equity-stakes and contributions diverge. However, other key players could also see problems. For instance, would your VC still be okay if the dropout-cofounder situation develops? Would a new VC who might invest in your next round be okay with it? (See “Startup.com” for a $700,000 hit that the founders suffered because of the last problem.) Have you set up mechanisms to help avoid such problems? If so, I’d love to hear about them.I wish you all the best with the venture, and look forward to hearing how the team and venture evolve in the coming months!
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