Co-Founder Equity Mistakes to Avoid with Michael Seibel | Startup School

**Michael Seibel** (0:09)
Hello, I'm Michael Seibel, and today I'm going to talk about co-founder equity splits and co-founder breakups. To be clear, we want people who are building tech, software, startups that they expect to be VC funded. You know, this is advice for you. I can't really comment on other types of businesses. There are many types of businesses that have equity. And to be clear, this is not really about them. Also, this is really focused on conversations that founders are having in the beginning of a company. For pre-product market fit companies, they're really talking about the beginning of companies. All kinds of interesting and crazy things happen later on. And it would be a misuse of this video and this advice to apply to companies that are later on or to apply to companies that are not tech companies. So here's the TLDR. The core advice we want to give is be generous with co-founder equity. What you're trying to do is motivate your founding team to work extremely hard when it looks for many of the first couple years like things are not working. The biggest mistake is to be stingy on equity during this very, very, very delicate time in the beginning of a startup, causing people to leave while it's still possible you might make something big. So the Jedi founder and the dumb founder, they're both generous with co-founder equity. The midwit, oh, they're thinking about skill sets and contributions and time commitments and the network and future roles and da-da-da-da-da. Thinking about all of these things and trying to do a really complicated calculation, I'm going to argue today that's not required. Let's go over what we're talking about. First, co-founder equity splits, then co-founder breakups, bad reasons for very unequal equity splits, common bad advice, and then some final thoughts. All right, co-founder equity. In my experience, the mistake that founders make is they don't think about how to motivate their team, their founder, co-founders, today and tomorrow. Typically, you're giving people equity over that they're going to earn over the course of four years. And you don't want them to be thinking in year two, year three, year four, I don't have enough equity, I'm not motivated. Or I have this amount of equity and the CEO is four times more, but I'm grinding every day and I've been here since the beginning, which would create resentment. So the job of a CEO when distributing co-founder equity is to not just think about what's going to convince your co-founder to work on your company today. It's to think about what's going to keep them motivated over the course of all four years and hopefully much longer. In that situation, our typical advice is to go for close to equal equity splits. Don't have to be exactly equal, but the more generous you are, the more you can expect a strong founder to stay motivated. Next, vesting and cliffs. Most often when you're giving founders equity, that equity vests over a period of time, which means it's earned over a period of time. And if you leave during that period of time, you don't get all of the equity. In addition, a cliff is essentially designed to say, if you don't make it to this moment in the company's history, if you don't make it through year one, you don't get any of your equity grant. Both of those tools are extremely valuable, and they should apply to all founders. I have to be honest. Sometimes founders ask me, why are we doing this? Like we all like each other, we're not going to break up, nothing's going to go wrong. I would just say this, giving away founder equity is not something that you should be innovating on. And the best practice is that all of equity comes with vesting and cliffs when it's given to founders. Life happens, crazy shit happens. Sometimes people have to leave, and they don't even want to leave. Sometimes family circumstances change. Sometimes people get sick. Sometimes people don't perform. So by having vesting and having a cliff, that gives founders the ability to let other founders go or for those founders to leave without destroying the cap table. So you should be using vesting and cliffs. What's extremely typical is four-year vesting. You earn your stock over four years and a one-year cliff. You don't earn any stock until you've hit one year of working at the company. Next, your co-founders must be essential to your founding team. One of the things I think about with the founding team is that it's the smallest number of people who can get an MVP built, get it in the hands of customers and start learning. One of the reasons why we tell people, one of the other reasons why we tell people to be generous with their equity is it helps them remove quote unquote co-founders who are not essential, who really shouldn't be on the team or perhaps should be employees instead of founders. You should understand that the co-founder title is not something that should just be given out willy-nilly. Teams that come into YC with five, six, seven co-founders, clearly there's something weird, some conversation hasn't happened. It's almost always the case that seven people are not essential to getting a product up and out and in the hands of customers. Next, always remember that once again, in almost every case, when you're giving out co-founder equity, most of the work in your company hasn't been completed. So this kind of comes back to the first point.