Personally, I think an equal equity split works out well Because I feel like it really makes the co-founders to realize and be aware that they've got a stake in this. Google did it, Stripe did it and it seems to work well for them
@ycombinator what do you think, if instead of bringing onboard as co-founders, we hire the same people but give them a part of equity pie, as a motivation? That way we protect our cap table.
Chapters (Powered by ChapterMe) - 00:00 - Intro 01:50 - Equity Overview 02:03 - Co-founder equity 03:11 - Vesting and Cliffs 04:44 - Co-founders must be essential to the founding team 05:45 - What is equity about 06:39 - Co-founders conversations if things don't work out 07:05 - Co-founder leaves before their 1-year cliff 07:28 - After 1 year cliff but pre-PMF 09:42 - Bad reason for massively unequal equity split 10:30 - I came up with the idea 10:59 - I started working 6 months before my co-founder 11:26 - My co-founder needs a salary, and I don't 12:10 - I'm older and more experienced than my co-founder 12:41 - I hired my co-founder after pre-seed / seed round 13:11 - I hired my co-founder post launch 13:19 - Sum-up: Short-term thinking 14:06 - Common bad advice 14:20 - Performance based equity 15:12 - Part time founders 15:40 - Dynamic equity agreements 17:14 - Wrap-up
I feel like this video is like the movie Prometheus, so good and so bad in so many ways. Equity alone doesn’t motivate people, I have seen many 50-50 splits with adequate funding break because of conflicts. Founders agree to certain things in the beginning but very soon these are forgotten, even when conditions are written, certain things stop being ok for them. So they act aggressive or just don’t perform. An example is, like how the video talks about founders with too little equity getting upset overtime. I have seen founders with 50% equity who got upset because spotlight wasn’t on them. I have seen CTO that wanted to be the CEO, eventually that glue that keeps complimentary founders together isn’t about a skills comparision, is what they want to do in the company complimentary or not is the real question. I have seen founders fighting about who should pitch, when answer is clear because one of the founders steal the show while the other one couldn’t even speak when he got excited. His reasoning was he should learn to pitch, but should that training really be on one of those few opportunities your startup will get to talk to investors? Then because he couldn’t pitch resentment grows, this isn’t healthy and breaks startups.
Great advice. I started an enterprise software company with my cofounder and we split 50-50. He resigned from company but still shareholder. I was left to do all the heavy lifting. The company has turned out pretty successful and I can’t get him out. He’s getting dividends and he didn’t do much. That hurts. I’m building the second company and I am wiser now.
Once you find the right co-founder, you won’t hesitate to give them a fair share of equity. But finding the right cofounder is very hard. And yes you have to be very picky about it.
This is my best lesson so far. I am starting a university in a rural place and need lots of support and education like this. New to the game. Let us communicate with any who want to help.
We've observed the same recurring issue with contestants on Ready Set StartUP TV show when bringing on co-founders. They worry about giving away too much equity, while the joining founders feel they're getting too little. Ultimately, not lasting a year and simply dissolve for lack of engagement.
Quick summary if you don't want to listen to the whole video: - Be generous with co-founder equity to ensure long-term motivation and commitment. - Use vesting and cliffs for all founders to protect the company if someone leaves. - Co-founders should be essential and motivated by equity for future work, not past contributions. - Avoid performance-based or complex equity structures; focus on straightforward, motivating equity splits. - CEOs must have the authority to remove underperforming co-founders and should plan for potential breakups.
Equity is for sure a part of motivation. However, the person HAS to believe in the 'why' behind the product. It's incredible how much someone will get behind and work their butts off if they strongly believe in what's being created. Before you give any equity or go the next level, and make someone a founder, make sure they have a hardcore belief in what it is your building.
50-50 seems to be a terrible way to do things, especially when it comes to quick decision-making. The Founder's Dilemmas speaks to this exact problem. How come thay differs so much from the advice being given here?
I approached someone after coding a project for a whole year, I had the intention to split but even with that he wouldn't be responsible to do anything that requires money without me! Remember he has a job somewhere else and I don't, but when there is a need for something he calls me and says "we need x amount would you bring x/2 ..." I realized I had to cut down his equity to 25% Definitely my efforts should be compensated,
When you identify the people who really deserve to be motivated with good pay and equity, it helps you understand their job titles and what they do better.
Recently got kicked out of my startup (no funding, bootstrapping) as the CEO/COO for performance issues and personal attacks/arguments. It has been a learning experience. The CTO did the product building and consistently leveraged that in arguments so we were not all equally yoked. Unfortunately we live together so that exasperated the relationship (CTO and I). I started to close bank accounts and I’d to close the credit cards I personally guaranteed but now we’re in limbo. Not interested in talking to him at this point. I just want to cut ties without messing people over.
So sorry to hear this... This scenario is challenging and happens often. Think smart, think AHEAD, and play your next 2-3 moves very, VERY wisely. Good luck!
Oh I was kicked out by investors after I’ve built whole tech part. But nothing stops from just building an alternative and giving it to clients for free…😂😂😂
the main problem I see is that a lot of CTOs and tech guys swear that they are holding the Holy Grail in the business. A lot of sales and C suites have to deal with their bs because they are technically minded. Anyhow, I am up for creating a startup if you are interested and we do it right. Working on one now.
Vinod Khosla would agree. In the interview with Altman he revealed the he advised his son to keep only 15% in his startup and gave the rest to co-founders and first employees
How common is it for vesting to reset on funding rounds? A seed investor asked for this, we eventually negotiated that we wouldn't, but it felt like they considered it standard.
what will happen if there is a bad VC or investor that is trying to take advantage on almost equal share structure? There will always be conflict, if VC with 10% share team up with any of the founders the other one will be the victim. I think the equal equity split is extremely beneficial to investors rather than founders
YC doesn't care how you split.. for them stability is important as YC will get their % anyway. Equal split is nonsense, it should be based on contribution... don't waste your equity and if you can pull it yourself don't get co-founders just for the sake of it - do it yourself and then hire people.
If you are doing it right, your cofounders should be contributing just as much as you. Which is why the equal split is suggested. It’s almost like you didn’t watch the video.
I’m going to join a pre-seed startup company as a first engineer / CTO and the CEO generously said that he gives me 10% of equity. No vesting schedule and I have to return all equity if I leave the company before IPO. It’s pretty normal in Japan. But I don’t care because I only join for the first few years building my career capital and software for my own startup 😂
Mutually decide on how much percentage you wish of offer to the 3rd Co-founder and proportionally reduce both of your percentages. This way the balance remains.
You can't talk about "founders" without defining what you mean by founder. Corporate structures and shareholder agreements distinguish between equity and directorship. It's typical of some VCs to push startups to distribute equity as broadly as possible because it's how they retain a controlling interest even as a minority shareholder. Dividing geeks is a good way to keep them in check. In contrast, solid companies have a strong directorship that allows the "founder and CEO" (or a very small core team) to conduct the company through difficult decisions by having a controlling interest. Think of a republic as opposed to an anarchy : Legislatures that have a majority party are more efficient than those who are split across the board. Just ask the French. Mark Zuckerberg could not have driven Facebook the way he did, had he only have a congruent share of the pie. Corporations, kids, are ideally benevolent dictatorships - they never work as a kibbutz. Yes, you need a cliff and vesting, and you need to reward commitment, but the best companies are those whose founders are motivated by the solution they seek to build, and not just the cash they dream to earn. Missionaries as opposed to mercenaries.
This is very compelling. I'm 50/50 at my very early startup. I'm going to discuss splitting the directorship more in my favor for control while offering him more in non voting shares. He gets more but I steer the ship. He's not as strategically minded as I am and is more of a soft asset in sales so I think it makes more sense for him to focus on increasing value while it makes sense for me to ensure we are making the correct strategic moves for long term growth.
Man, a big thing is what that question means and how Your cofounder thinks about it. You have to work it out with them that's number one. And I came up with the idea: I 've worked on my patent for years now and have sunk quite some money into it. I would have a problem with an equal split at the beginning. If there are months to years of successful working on it, total different story.
I'm working with a cofounder who has years of experience and connections in the market. We're starting a software platform which he has almost no experience doing but I do. What he brings to the table is many big name clients, sales, and product vision which is something I could never get on my own. Was the idea his? Yeah. But without both components, without both of us, the product could never come to market. Both of us could go find other cofounders but that would be extremely challenging to find someone as excited about our idea as we are. What I'm saying is an idea is worth almost nothing without the right people to act on it. Getting the right people that gain you a competitive advantage in your target market is what creates value in the company and is what should determine equity.
@@jupiterjones3789 we were friends. He approached me for help with web development and I initially agreed to help him as a favor. I've attempted a startup before so I had some experience in refining a business idea so I offered to walk him through the steps and in doing so I realized he had an amazing vision with huge potential. I continued to help him refine his idea until I eventually proposed a partnership when he enthusiastically agreed. My advice is always let people know you are wanting to start a business of your own and what your skills are, be willing to help people, and be approachable and kind. If he didn't think he could ask me for help I'd never have this opportunity.
If a founding team member left say halfway during the 2nd year. Does the shares assigned to this person get automatically redistributed to the rest of the founding team, or do the shares go to the regular employee shares pool?
I volunteered to a mentor two high school students in am entrepreneurship completion. We won the competition with our proposed EdTech startup idea, which came from the two high school students that mentored. But unlike me, a software developer, they didn't have the expertise and resources to bring the idea to life even as an MVP. My spouse and I are investing our personal resources to develop the MVP and bring the app/startup into the hands of real users. We have transitioned into a registered startup from a mere winning idea presented in a competition. The parents of my co-founders are contributing nothing towards to venture, the coordinator of the competition insists it was their idea, and they must own a greater percentage of the equity. I, the current CEO/CTO presented all co-founders an agreement that gives each one of the the students 15% equity pre-mvp in recognition of their initial involvement, plus other future benefits should we succeed. What's your comment, advice and recommendation to me?
An idea isn’t worth 30% - it’s barely worth anything. Sounds like a terrible agreement. I understand that you want to reward them, and that you’re also possibly afraid to seem like you’ve “used” them to get an idea etc. But 30% is outrageous… I’d say 2.5% for each is much more reasonable, but I’m not sure. Regardless, that the general bullpark imo.
A small percentage and a cash sum payout later if you're successful is more than enough for an idea, especially since they can provide little to bringing that idea to market given their lack of experience.
People get REALLY attached to ideas. I agree with the comment above, ideas aren’t worth anything. You’ve taken all the risk, and invested your time and money. This is a tough topic because the parents likely will feel insulted if you offer anything less than what they’re hoping for. That is not your problem though, but you know the situation better than we do. If it were me, I would give them anywhere from 0% to 5% each. This depends on how well you know them too.
You're contradicting yourself with first saying the later years of a company are worth equity and then at the end saying the first years are very important.
4 years is too short a period for getting the job done. Is there a reason why atleast the co-founder vesting is stretched for more longer? - Let's say 10 years
If we intend to raise money with VCs, is it irrelevant how much equity i have given up before the first round of fundraising? Somewhere i've read, one shouldn't give up more than 20 % of the company. Can i distribute 80% of my company among my co-founders and first employees and still successfully raise money?
Right out of the gate I offered a 50-50 with my cofounder. I'm a domain SME, he is a Software Engineer. Should we want to motivate a vital resource in future, where should that % come from? Does it have to be both of us?
Not sure I agree with ‘one person has to be the captain’ if you simultaneously believe that the founders must only be the essential members. I’m not saying that isn’t a valid way to organize, I’m just saying it isn’t the only valid strategy, cooperatives exist with similar or better survival rates to traditional top down companies for a reason. Edit: also ‘part time founders are not founders’ is kinda ridiculous. Most people can’t be ‘start up people’ if your definition of that requires all or nothing level commitment. People have bills to pay and mouths to feed not to mention any other number of constraints and life things
Summary by Each AI Co-Founder Equity Splits: - Generosity with Equity: It's crucial to be generous with equity to motivate co-founders over the long term, especially in the early stages when the company is still unproven. - Equal vs. Unequal Splits: Close to equal equity splits are recommended to avoid resentment and keep co-founders motivated. Unequal splits based on factors like idea ownership or early work can lead to dissatisfaction later. - Vesting and Cliffs: Implementing a four-year vesting period with a one-year cliff is essential to protect the company and ensure co-founders are committed for the long haul. Co-Founder Breakups: - Pre-Product Market Fit: If a co-founder leaves or is fired before the one-year cliff, they typically receive a token equity amount (2-5%). Post-cliff, but still pre-product market fit, they should retain no more than 5% equity. - Board Resignation and Voting Rights: Departing co-founders should resign from the board and transfer voting rights to remaining co-founders to ensure continued alignment and decision-making power. Common Mistakes and Bad Advice: - Performance-Based Equity: Avoid tying equity to specific performance metrics, as these can be hard to set and may demotivate co-founders. - Part-Time Founders and Complex Equity Schemes: Part-time founders should not be considered, and overly complex equity agreements should be avoided. Clear and straightforward equity structures, with vesting and cliffs, are more effective for maintaining motivation and protecting the company.
The person providing the value on a part-time basis will inadvertently provide more value while working on the startup on a Full-time basis. For investors, they need to know you are fully committed before they will commit their funds.
@ycombinator I am so grateful to you for sharing this knowledge. Is there any advice on how much equity should I retain in consideration of future fund raises i.e. to keep future investors motivated? or any other way to set some terms in the co-founders agreements to part with some of their shares should fund be raised later in the journey? Thanks
This advice only serves investors, can’t knock it. Imagine building the app yourself then giving 1/2 the equity to someone that’s didn’t contribute anything yet. 😂
I disagree here. You would not build the app then give someone half. If you could make the MVP yourself and present it to customers, you probably don't even need a cofounder tbh. If you do need a cofounder, whether technical or not, remember that you are giving them 50% of a company that you think would not work without them. An app is not a company, and a company is not an app
Why does YC have such patience for founders to spend years learning about customers in order to get to product / market fit? In my opinion, much of this should be done pre-incorporation.
The best co-founders are those who share spheres of influence. At JetSoftPro, a software development service, we've noticed that if one person is in charge of, for example, the technical side and another is in charge of marketing and sales, things go better than when everyone does everything
What's your strategy for motivating co-founders in the early days?
Personally, I think an equal equity split works out well
Because I feel like it really makes the co-founders to realize and be aware that they've got a stake in this. Google did it, Stripe did it and it seems to work well for them
Slicing pie
Spending as much time together as possible, even outside of work
@@ycombinator equal equity is the only way to motivate everyone and the product actually working
@ycombinator what do you think, if instead of bringing onboard as co-founders, we hire the same people but give them a part of equity pie, as a motivation?
That way we protect our cap table.
This is the best video about equity split. I love the idea of "99% of the work is still to be done" and be a long term thinker. Thanks for sharing.
Who else thought they were only going to watch a couple of minutes and stayed until the end? Golden advice from Michael!
"Giving away founder equity is not something that you should be innovating on" is great advice.
Chapters (Powered by ChapterMe) -
00:00 - Intro
01:50 - Equity Overview
02:03 - Co-founder equity
03:11 - Vesting and Cliffs
04:44 - Co-founders must be essential to the founding team
05:45 - What is equity about
06:39 - Co-founders conversations if things don't work out
07:05 - Co-founder leaves before their 1-year cliff
07:28 - After 1 year cliff but pre-PMF
09:42 - Bad reason for massively unequal equity split
10:30 - I came up with the idea
10:59 - I started working 6 months before my co-founder
11:26 - My co-founder needs a salary, and I don't
12:10 - I'm older and more experienced than my co-founder
12:41 - I hired my co-founder after pre-seed / seed round
13:11 - I hired my co-founder post launch
13:19 - Sum-up: Short-term thinking
14:06 - Common bad advice
14:20 - Performance based equity
15:12 - Part time founders
15:40 - Dynamic equity agreements
17:14 - Wrap-up
I feel like this video is like the movie Prometheus, so good and so bad in so many ways.
Equity alone doesn’t motivate people, I have seen many 50-50 splits with adequate funding break because of conflicts.
Founders agree to certain things in the beginning but very soon these are forgotten, even when conditions are written, certain things stop being ok for them. So they act aggressive or just don’t perform.
An example is, like how the video talks about founders with too little equity getting upset overtime.
I have seen founders with 50% equity who got upset because spotlight wasn’t on them. I have seen CTO that wanted to be the CEO, eventually that glue that keeps complimentary founders together isn’t about a skills comparision, is what they want to do in the company complimentary or not is the real question.
I have seen founders fighting about who should pitch, when answer is clear because one of the founders steal the show while the other one couldn’t even speak when he got excited.
His reasoning was he should learn to pitch, but should that training really be on one of those few opportunities your startup will get to talk to investors?
Then because he couldn’t pitch resentment grows, this isn’t healthy and breaks startups.
Great advice. I started an enterprise software company with my cofounder and we split 50-50. He resigned from company but still shareholder. I was left to do all the heavy lifting. The company has turned out pretty successful and I can’t get him out. He’s getting dividends and he didn’t do much. That hurts. I’m building the second company and I am wiser now.
Pay yourself a bigger salary? Salary is the compensation for your hard work. It's clear you don't know how things work
@@ZelenoJabkoreplying “you don’t know how things work” to a random youtube comment is crazy. Keep your head down and work hard boy
@@squishypillow3162 He does not, how else would you write such a comment! Equity and employment are two distinct things.
That hurts!
@ZelenoJabko if another person has 50% he can block almost any decision such as CEO compensation or amount of dividends
Once you find the right co-founder, you won’t hesitate to give them a fair share of equity. But finding the right cofounder is very hard. And yes you have to be very picky about it.
This is my best lesson so far. I am starting a university in a rural place and need lots of support and education like this. New to the game. Let us communicate with any who want to help.
We've observed the same recurring issue with contestants on Ready Set StartUP TV show when bringing on co-founders. They worry about giving away too much equity, while the joining founders feel they're getting too little. Ultimately, not lasting a year and simply dissolve for lack of engagement.
Want to thank you for all your wisdom, humility, passion and love for the startup community, Michael. Amazing stuff!
Quick summary if you don't want to listen to the whole video:
- Be generous with co-founder equity to ensure long-term motivation and commitment.
- Use vesting and cliffs for all founders to protect the company if someone leaves.
- Co-founders should be essential and motivated by equity for future work, not past contributions.
- Avoid performance-based or complex equity structures; focus on straightforward, motivating equity splits.
- CEOs must have the authority to remove underperforming co-founders and should plan for potential breakups.
Equity is for sure a part of motivation. However, the person HAS to believe in the 'why' behind the product. It's incredible how much someone will get behind and work their butts off if they strongly believe in what's being created. Before you give any equity or go the next level, and make someone a founder, make sure they have a hardcore belief in what it is your building.
50-50 seems to be a terrible way to do things, especially when it comes to quick decision-making. The Founder's Dilemmas speaks to this exact problem. How come thay differs so much from the advice being given here?
I approached someone after coding a project for a whole year, I had the intention to split but even with that he wouldn't be responsible to do anything that requires money without me!
Remember he has a job somewhere else and I don't, but when there is a need for something he calls me and says "we need x amount would you bring x/2 ..."
I realized I had to cut down his equity to 25%
Definitely my efforts should be compensated,
Bro we have the same pfp 😉😂
When you identify the people who really deserve to be motivated with good pay and equity, it helps you understand their job titles and what they do better.
Recently got kicked out of my startup (no funding, bootstrapping) as the CEO/COO for performance issues and personal attacks/arguments. It has been a learning experience.
The CTO did the product building and consistently leveraged that in arguments so we were not all equally yoked. Unfortunately we live together so that exasperated the relationship (CTO and I). I started to close bank accounts and I’d to close the credit cards I personally guaranteed but now we’re in limbo. Not interested in talking to him at this point. I just want to cut ties without messing people over.
So sorry to hear this... This scenario is challenging and happens often. Think smart, think AHEAD, and play your next 2-3 moves very, VERY wisely. Good luck!
Oh I was kicked out by investors after I’ve built whole tech part. But nothing stops from just building an alternative and giving it to clients for free…😂😂😂
the main problem I see is that a lot of CTOs and tech guys swear that they are holding the Holy Grail in the business. A lot of sales and C suites have to deal with their bs because they are technically minded.
Anyhow, I am up for creating a startup if you are interested and we do it right.
Working on one now.
@@o.c.d.5844seeking for ctos?😅
Seibel!!! We missed you bro!
Vinod Khosla would agree. In the interview with Altman he revealed the he advised his son to keep only 15% in his startup and gave the rest to co-founders and first employees
You gonna get diluted so badly with 15% om every funding round
@@Travelsync15715% of a company with a high valuation or market cap could be huge!
VCs don't like when founder is diluted
Correct 100% of Zero is $0. Successful exit is more valuable.
How about for solo founder's first hires?
Thank you for humbling me and educating me.
One of the episode of "Statup" series on Netflix discussed this very important point
How common is it for vesting to reset on funding rounds? A seed investor asked for this, we eventually negotiated that we wouldn't, but it felt like they considered it standard.
It's really not
This is excellent Michael
does YC provide a co-founder agreement template we could use?
1:32 took notes
I've been looking for this diagram for forever - can relate to it in so many places in my life, and now I found it
what will happen if there is a bad VC or investor that is trying to take advantage on almost equal share structure? There will always be conflict, if VC with 10% share team up with any of the founders the other one will be the victim. I think the equal equity split is extremely beneficial to investors rather than founders
Now I feel reassured I’m doing this right :) Thanks!
YC doesn't care how you split.. for them stability is important as YC will get their % anyway. Equal split is nonsense, it should be based on contribution... don't waste your equity and if you can pull it yourself don't get co-founders just for the sake of it - do it yourself and then hire people.
Honestly I also agree with you on this. YC has a hidden agenda here as an investor
This truly makes a lot of sense😅
If you are doing it right, your cofounders should be contributing just as much as you. Which is why the equal split is suggested. It’s almost like you didn’t watch the video.
Wait. Isn’t stability among the founders critical for success? If your cofounder isn’t worth near equal split, is that person the right cofounder?
If this is good for the investor shouldn’t it be good for the biggest equity holder which is the initial founder?
I’m going to join a pre-seed startup company as a first engineer / CTO and the CEO generously said that he gives me 10% of equity. No vesting schedule and I have to return all equity if I leave the company before IPO. It’s pretty normal in Japan. But I don’t care because I only join for the first few years building my career capital and software for my own startup 😂
What happens if let’s say you have a 60/40 split with a cofounder and you both decide to add a third cofounder, how do you split that up?
Mutually decide on how much percentage you wish of offer to the 3rd Co-founder and proportionally reduce both of your percentages. This way the balance remains.
3:12 Cliffs are disrespectful when used to clean someone from all its equity, using the trick that every new fundraise can reset everyone's vesting
Thank you Michael
You can't talk about "founders" without defining what you mean by founder. Corporate structures and shareholder agreements distinguish between equity and directorship. It's typical of some VCs to push startups to distribute equity as broadly as possible because it's how they retain a controlling interest even as a minority shareholder. Dividing geeks is a good way to keep them in check. In contrast, solid companies have a strong directorship that allows the "founder and CEO" (or a very small core team) to conduct the company through difficult decisions by having a controlling interest. Think of a republic as opposed to an anarchy : Legislatures that have a majority party are more efficient than those who are split across the board. Just ask the French. Mark Zuckerberg could not have driven Facebook the way he did, had he only have a congruent share of the pie. Corporations, kids, are ideally benevolent dictatorships - they never work as a kibbutz. Yes, you need a cliff and vesting, and you need to reward commitment, but the best companies are those whose founders are motivated by the solution they seek to build, and not just the cash they dream to earn. Missionaries as opposed to mercenaries.
Your comment truly helped me to decide how to approach this problem. Thank you for sharing your wisdom!
This is very compelling. I'm 50/50 at my very early startup. I'm going to discuss splitting the directorship more in my favor for control while offering him more in non voting shares. He gets more but I steer the ship. He's not as strategically minded as I am and is more of a soft asset in sales so I think it makes more sense for him to focus on increasing value while it makes sense for me to ensure we are making the correct strategic moves for long term growth.
Great advice man!
Spot on ❤
Great tips Thank you so much for sharing this
Would you say "I came up with the Idea" is a good reason for a 55, 45 equity split.
Man, a big thing is what that question means and how Your cofounder thinks about it. You have to work it out with them that's number one.
And I came up with the idea: I 've worked on my patent for years now and have sunk quite some money into it. I would have a problem with an equal split at the beginning. If there are months to years of successful working on it, total different story.
I'm working with a cofounder who has years of experience and connections in the market. We're starting a software platform which he has almost no experience doing but I do. What he brings to the table is many big name clients, sales, and product vision which is something I could never get on my own.
Was the idea his? Yeah. But without both components, without both of us, the product could never come to market. Both of us could go find other cofounders but that would be extremely challenging to find someone as excited about our idea as we are.
What I'm saying is an idea is worth almost nothing without the right people to act on it. Getting the right people that gain you a competitive advantage in your target market is what creates value in the company and is what should determine equity.
@@ImperiumLibertas Fascinating! May I ask, how You found each other?
@@jupiterjones3789 we were friends. He approached me for help with web development and I initially agreed to help him as a favor. I've attempted a startup before so I had some experience in refining a business idea so I offered to walk him through the steps and in doing so I realized he had an amazing vision with huge potential. I continued to help him refine his idea until I eventually proposed a partnership when he enthusiastically agreed.
My advice is always let people know you are wanting to start a business of your own and what your skills are, be willing to help people, and be approachable and kind. If he didn't think he could ask me for help I'd never have this opportunity.
Great video that any tech founder should watch!
Wow, just wow. Thank you so much for this.
If a founding team member left say halfway during the 2nd year. Does the shares assigned to this person get automatically redistributed to the rest of the founding team, or do the shares go to the regular employee shares pool?
It becomes unallocated and the company owns it. No, it can't be redistributed among the founding team
Wow, great advise. I wish I watched the video earlier.
How did You do it?
Thanks Michael
This was really helpful ❤ 😊
I think this is good advice. But it’s funny how little of this logic applies to early employee grants!
Michael rules
Thank you 😊
Thanks for sharing very good insights!
I volunteered to a mentor two high school students in am entrepreneurship completion.
We won the competition with our proposed EdTech startup idea, which came from the two high school students that mentored.
But unlike me, a software developer, they didn't have the expertise and resources to bring the idea to life even as an MVP.
My spouse and I are investing our personal resources to develop the MVP and bring the app/startup into the hands of real users.
We have transitioned into a registered startup from a mere winning idea presented in a competition. The parents of my co-founders are contributing nothing towards to venture, the coordinator of the competition insists it was their idea, and they must own a greater percentage of the equity. I, the current CEO/CTO presented all co-founders an agreement that gives each one of the the students 15% equity pre-mvp in recognition of their initial involvement, plus other future benefits should we succeed.
What's your comment, advice and recommendation to me?
An idea isn’t worth 30% - it’s barely worth anything.
Sounds like a terrible agreement. I understand that you want to reward them, and that you’re also possibly afraid to seem like you’ve “used” them to get an idea etc.
But 30% is outrageous… I’d say 2.5% for each is much more reasonable, but I’m not sure. Regardless, that the general bullpark imo.
A small percentage and a cash sum payout later if you're successful is more than enough for an idea, especially since they can provide little to bringing that idea to market given their lack of experience.
People get REALLY attached to ideas. I agree with the comment above, ideas aren’t worth anything. You’ve taken all the risk, and invested your time and money. This is a tough topic because the parents likely will feel insulted if you offer anything less than what they’re hoping for. That is not your problem though, but you know the situation better than we do. If it were me, I would give them anywhere from 0% to 5% each. This depends on how well you know them too.
Will be applied.
Great video!
Great Video Content
Next Part Kab Aara hai
thanks for the sage advice
Is it a good idea to make a Goodbye party for a leaving co-founder?
Great video, one of your best!
Great talk.
Hey @ycombinator, how do you define "Product-Market Fit" in the cofounder's agreement?
You're contradicting yourself with first saying the later years of a company are worth equity and then at the end saying the first years are very important.
2 things can be true at the same time💡
4 years is too short a period for getting the job done. Is there a reason why atleast the co-founder vesting is stretched for more longer? - Let's say 10 years
average time for a startup to reach unicorn status (if they don't die) is 6-10 years. Doesn't make sense to keep vesting to 10 years.
If we intend to raise money with VCs, is it irrelevant how much equity i have given up before the first round of fundraising? Somewhere i've read, one shouldn't give up more than 20 % of the company. Can i distribute 80% of my company among my co-founders and first employees and still successfully raise money?
First one to comment ! Wish you luck in all your endeavors.
Thank you.
Loving the Columbia sweater, link to it?
Thank you sir
What If I start a company and wanna get a confounder, we don’t need funding cause I funded it with 3 million dollars. How much should I give him.
Right out of the gate I offered a 50-50 with my cofounder. I'm a domain SME, he is a Software Engineer. Should we want to motivate a vital resource in future, where should that % come from? Does it have to be both of us?
It’s worth carving out 10-15% at the outset of the company as unassigned equity that can be used for key hires / employee option pool
Advice for Equity Agreements?
Interesting but some of this doesn't apply to AI-startups. We're in a new era, the risk-reward ratio has changed.
Not sure I agree with ‘one person has to be the captain’ if you simultaneously believe that the founders must only be the essential members. I’m not saying that isn’t a valid way to organize, I’m just saying it isn’t the only valid strategy, cooperatives exist with similar or better survival rates to traditional top down companies for a reason.
Edit: also ‘part time founders are not founders’ is kinda ridiculous. Most people can’t be ‘start up people’ if your definition of that requires all or nothing level commitment. People have bills to pay and mouths to feed not to mention any other number of constraints and life things
They have founders in mind they finance; basically they are saying if we gave You a lot of money, You should usually work full time on it
Summary by Each AI
Co-Founder Equity Splits:
- Generosity with Equity: It's crucial to be generous with equity to motivate co-founders over the long term, especially in the early stages when the company is still unproven.
- Equal vs. Unequal Splits: Close to equal equity splits are recommended to avoid resentment and keep co-founders motivated. Unequal splits based on factors like idea ownership or early work can lead to dissatisfaction later.
- Vesting and Cliffs: Implementing a four-year vesting period with a one-year cliff is essential to protect the company and ensure co-founders are committed for the long haul.
Co-Founder Breakups:
- Pre-Product Market Fit: If a co-founder leaves or is fired before the one-year cliff, they typically receive a token equity amount (2-5%). Post-cliff, but still pre-product market fit, they should retain no more than 5% equity.
- Board Resignation and Voting Rights: Departing co-founders should resign from the board and transfer voting rights to remaining co-founders to ensure continued alignment and decision-making power.
Common Mistakes and Bad Advice:
- Performance-Based Equity: Avoid tying equity to specific performance metrics, as these can be hard to set and may demotivate co-founders.
- Part-Time Founders and Complex Equity Schemes: Part-time founders should not be considered, and overly complex equity agreements should be avoided. Clear and straightforward equity structures, with vesting and cliffs, are more effective for maintaining motivation and protecting the company.
No no.. Just form a new company by transferring the exact percentages + left founder's share
If someone makes a diagram of this strategy, please tag me
Slicing pie
Part-time is fine if someone brings value
The person providing the value on a part-time basis will inadvertently provide more value while working on the startup on a Full-time basis. For investors, they need to know you are fully committed before they will commit their funds.
Gonzalez Sarah Hernandez Edward Perez Michael
eh if i only knew that 2 yrs ago when we started
Yea but what about even the company is worth 10 million $$. 10% is allot
Shotgun clause
@ycombinator I am so grateful to you for sharing this knowledge. Is there any advice on how much equity should I retain in consideration of future fund raises i.e. to keep future investors motivated? or any other way to set some terms in the co-founders agreements to part with some of their shares should fund be raised later in the journey? Thanks
1st comment
This advice only serves investors, can’t knock it. Imagine building the app yourself then giving 1/2 the equity to someone that’s didn’t contribute anything yet. 😂
I disagree here. You would not build the app then give someone half. If you could make the MVP yourself and present it to customers, you probably don't even need a cofounder tbh.
If you do need a cofounder, whether technical or not, remember that you are giving them 50% of a company that you think would not work without them. An app is not a company, and a company is not an app
@@adpadillar If they take salary for years, then again giving equity does not make any sense
Thank you 🎉❤😂😂😂
Davis Kevin Taylor Charles Perez Jennifer
Why does YC have such patience for founders to spend years learning about customers in order to get to product / market fit? In my opinion, much of this should be done pre-incorporation.
unsurprising concentration of midwittery in comments. power laws galore. good thing that returns come from selecting geniuses, not teaching morons
:)
am i the only one finding these so obvious things?
By the look of the comment section, yes…
The best co-founders are those who share spheres of influence. At JetSoftPro, a software development service, we've noticed that if one person is in charge of, for example, the technical side and another is in charge of marketing and sales, things go better than when everyone does everything