and how do you divide equity amongst co-founders?
This is one of those questions that comes up every once in a while, and it does so in different shapes and sizes — ranging from equity distribution to discontent over the feeling that one is working harder than the other, or one’s contribution far outshadows the contribution by others.
But one of the most prominent ones has been on how many founders should a startup have.
This particular Quora question caught my eye because it had both elements in it — equity distribution, as well as the tension over the unnecessary number of founders.
The fact is — There is no set rule.
MUST HAVE A MINIMUM OF 2 FOUNDERS
This is a concept fuelled by countless blogs as well as opinions by prominent experts and venture capitalists, and somehow the opinion started setting itself down in stone and concrete as a rule.
Startups don’t succeed because of an optimum number of founders, and they wouldn’t fail because of the lack of it. So why is it that this notion has gained so much popularity and voice?
#1. OBVIOUSLY I WOULD LIKE TO PLACE A CALCULATED RISK
Running a startup is hard, and the times when you doubt your approach, capability, grit and market potential come way too often. For a startup that’s in its infancy, those times come many many times practically every week. If there are two or three people at the top, statistics come into play. The chances of all of them being down at the same time is relatively slim. So even if one of them isn’t capable of pulling the weight, there is always someone else who will step up to the task at hand.
#2. YOU PICK ME UP, AND I'LL DO THE SAME
An extension of point #1.
I have been a solo founder. And when I launched my first startup, I was 21. The problem wasn’t the time(s) when I would be down and feel like crap — I always knew those times would come. The problem was that even in those times, I had to keep my head in the game. I knew I did not have a lot of time to feel sorry for myself or wallow. I would feel down, get over it, and then I had to pick myself back up again. Yes. That was the hard part. Being the person who had to step up to the task of picking myself back up and set myself back on the right course.
Having a co-founder relieves you of that responsibility. You have someone to count on. Your investors know that as well. So, the way they see it, it is always preferable to bet on two horses instead of just one.
And make no mistake, in the early stages of your startup, they are placing their bets more on the horses than the terrain or the actual race itself.
#3. TWO HEADS ARE BETTER THAN ONE
“How many co-founders should a startup have” is a far less important question as compared to “What skillsets does my startup need”
To every entrepreneur who has ever sought my advice, I’ve always said — “Do whatever your business needs you to do”. And that is true for all facets of your business, including hiring.
It doesn’t matter who thought of the idea, the first thing you need to figure out are the skills that are needed for the business. Then you ask yourself — Do I have those skills?
If you do — great! If you don’t, then you go on a fishing trip, looking for resources that complement the set of skills you have, and together you contribute to a large segment of the set of skills your business needs at the moment. Now, whether you are able to bring these guys onboard as an employee or as a co-founder, that is something that shouldn’t matter much to you. You are building a team, and as long as the team shows promise of being a strong, cohesive unit, do whatever needs to be done.
Hence. Two/three heads are better than one. You possess certain skillsets, your co-founder(s) possess certain complementing skillsets. Together, you make a formidable team. Ergo, the investors’ thought process.
FAIR ENOUGH. BUT WHEN IS IT TOO MANY?
Once again. I don’t think there is a right answer to it. Sure. There are many things that you should consider here.
- The more co-founders you have, the more prone you are to the risk of someone crucial jumping ship — probably even at a stage when you may have needed them the most.
- Too many cooks DO spoil a broth.
- How many alphas do you think are there in a pack of wolves? :-)
Believe it or not, the last point is one of the most crucial ones. There is always one alpha. So do make sure there is a clearly identified alpha in the pack — not in aptitude and attitude, but with a much needed mix of capability as well. If you can’t do that, you are inviting disaster.
One of the weird things I have been witnessing lately is the emergence of co-CEOs. I am not sure how the investors feel about it (I do think I need to ask some of them about it), but I can’t think of a single reason to justify having co-CEOs in a startup other than to quench one’s ego. And emotions should practically have no place when it comes to setting up a business.
Circling back to the topic at hand, yes — there is absolute no correct answer to that question.
Housing.com started with 12 founders (yeah, you heard that right). And even though there came a time when the startup that was at one time thought to hold great promise went spiraling down almost to oblivion, the number of co-founders did not have a contributing role to it. Had that been the case, the company would not have been successful in raising a few substantial rounds of investment, would they?
OKAY. BUT WHAT ABOUT DISTRIBUTING EQUITY?
SaaS funding platform, Gust, has a sweet little tool that helps you determine
the right co-founder equity split. They even go ahead and explain the methodology that powers up their framework and equity-split calculator.
I may be wrong here, but in my opinion — BULLSHIT!
While a equity split calculator — either by Gust or AngelList or even Techcrunch — would be a good thing (since you would be leading with data and analysis from ‘reputed’ sources), the right equity split
SHOULD & WILL BE the one that every party involved is comfortable with.
As a startup founder, it is your foremost responsibility to make sure that the team is in a position to work together as a cohesive unit, towards the growth of the company. This responsibility becomes even more intense if you are stepping up to the mantle of the CEO of the company. You can’t do that if your team-members are feeling under-appreciated and undervalued for their hard work — even if they felt coerced into agreeing to a mathematical model.
So, the right co-founder equity split? Work it out amongst yourselves — as professionals, and as friends. Be respectful of each other’s contributions and figure out a model that works for everyone.