- The equity split with co-founders is crucial for their long-term motivation and commitment to the company.
- CEOs should prioritize creating an equity split that maximizes motivation rather than focusing on negotiation.
- Vesting with a cliff (4-year vesting with a 1-year cliff) is a safety mechanism for giving equity and allows for correction if necessary.
- CEOs should be generous with equity to create long-term motivation and ownership for co-founders.
- The equity split should be designed to motivate co-founders to work hard, recruit others, and feel like true owners of the company.
- Equal equity splits are a good rule of thumb, but consideration should be given to future motivation and worthiness of co-founders.
- CEOs should reconsider the team if they are not interested in the future motivation of co-founders or unwilling to provide a generous equity grant.

Y Combinator CEO and Partner Michael Seibel on splitting equity between cofounders.

https://twitter.com/mwseibel

Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year. 

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Chapters (Powered by https://bit.ly/chapterme-yc) -
00:00:00 How much equity to give your cofounders
00:00:23 Equity splits should maximize motivation
00:01:32 Safety mechanism for equity - Vesting and Cliff
00:02:21 More generous with equity not less
00:03:21 Equal equity splits
00:03:57 End

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How much equity to give your co-founders?

This is a problem and a question that a lot of people have written about, and you can see a lot of varied advice online.

My perspective is that most founders are missing a couple key points when divvying up their equity.

The first 1 is your equity splits with your co-founders are what's going to motivate your co-founders to stick with your company through the years and years and years it takes in order for you to build a large company that has massive impact.

Oftentimes the co-founders that you're speaking to don't quite understand how much of a time commitment they have to give to the startup if it works.

As a CEO who's responsible for figuring out what the equity split is, oftentimes you have to think about what your co-founders would want, even if they're not thinking about their own long-term interests at the moment.

1 of the biggest fallacies I hear from a founder is, well we came up with this equity split because that's what we negotiated.

Well as a great CEO your first thought has to be how do I come up with an equity split that's going to maximize the motivation of my teammates.

And if you're concerned about giving equity to teammates, that's not without reason.

There are lots of startup teams that break up.

There are lots of founders that leave, but your primary mechanism of safety when it comes to giving equity is vesting and a cliff.

So typically when you give equity to anyone in your company but including the founders, you have what's called 4 year vesting.

That means that you have to work at the company for 4 years to actually get that equity stake.

Typically also you have what's called a 1 year cliff.

That means if you leave or are fired from the company within the first year you get nothing.

So as a CEO that's trying to make sure you have a maximally motivated team, this is your hedge.

Vesting with the cliff, 4 year vesting with a 1 year cliff, is your hedge.

If you made a decision that was incorrect about choosing your co-founders, as long as you correct it within 1 year, there's no long-term harm to the company.

On the flip side, because you have that hedge, it probably benefits you more often than not to be more generous with the equity that you give your co-founders, not less.

Understanding that that equity is going to create long-term motivation to stick with your startup, especially during the times when your startup is not working well.

Almost every startup has times where things are not going well.

Really, what you have to think for as a CEO is, I don't want to create a situation where I have to motivate my co-founders every day.

I want their equity stake in this company to be the thing that gets them to wake up in the middle of the night, that gets them to work on the weekends, that gets them to work late, that gets them to recruit their friends, that gets them to feel like they are true owners of the company and not just employees.

I think that I don't want to prescribe exactly what equity split creates that phenomenon, but if you hit it, it's far more valuable.

Your company becomes far more valuable because your co-founders are all motivated.

You know, in the past I've said that most companies should have equal equity splits.

I think all things being considered equal is a nice and easy rule of thumb, but it can't be applied always.

So I would just always tell the CEO, be considerate about your future motivation of your co-founders.

And if you're not really interested in the future motivation of your co-founders, if you don't think you're going to need them in the long term, Why are you making them co-founders at all?

You should really reconsider who's on your team if you don't think they're worth a generous equity grant.


Speaker 0: How much equity to give your co-founders? This is a problem and a question that a lot of people have written about, and you can see a lot of varied advice online. My perspective is that most founders are missing a couple key points when divvying up their equity. The first 1 is your equity splits with your co-founders are what's going to motivate your co-founders to stick with your company through the years and years and years it takes in order for you to build a large company that has massive impact. Oftentimes the co-founders that you're speaking to don't quite understand how much of a time commitment they have to give to the startup if it works.

As a CEO who's responsible for figuring out what the equity split is, oftentimes you have to think about what your co-founders would want, even if they're not thinking about their own long-term interests at the moment. 1 of the biggest fallacies I hear from a founder is, well we came up with this equity split because that's what we negotiated. Well as a great CEO your first thought has to be how do I come up with an equity split that's going to maximize the motivation of my teammates. And if you're concerned about giving equity to teammates, that's not without reason. There are lots of startup teams that break up.

There are lots of founders that leave, but your primary mechanism of safety when it comes to giving equity is vesting and a cliff. So typically when you give equity to anyone in your company but including the founders, you have what's called 4 year vesting. That means that you have to work at the company for 4 years to actually get that equity stake. Typically also you have what's called a 1 year cliff. That means if you leave or are fired from the company within the first year you get nothing.

So as a CEO that's trying to make sure you have a maximally motivated team, this is your hedge. Vesting with the cliff, 4 year vesting with a 1 year cliff, is your hedge. This is your get out of jail free card. If you made a decision that was incorrect about choosing your co-founders, as long as you correct it within 1 year, there's no long-term harm to the company. On the flip side, because you have that hedge, it probably benefits you more often than not to be more generous with the equity that you give your co-founders, not less.

Understanding that that equity is going to create long-term motivation to stick with your startup, especially during the times when your startup is not working well. Almost every startup has times where things are not going well. Really, what you have to think for as a CEO is, I don't want to create a situation where I have to motivate my co-founders every day. I want their equity stake in this company to be the thing that gets them to wake up in the middle of the night, that gets them to work on the weekends, that gets them to work late, that gets them to recruit their friends, that gets them to feel like they are true owners of the company and not just employees. I think that I don't want to prescribe exactly what equity split creates that phenomenon, but if you hit it, it's far more valuable.

Your company becomes far more valuable because your co-founders are all motivated. You know, in the past I've said that most companies should have equal equity splits. I think all things being considered equal is a nice and easy rule of thumb, but it can't be applied always. So I would just always tell the CEO, be considerate about your future motivation of your co-founders. And if you're not really interested in the future motivation of your co-founders, if you don't think you're going to need them in the long term, Why are you making them co-founders at all?

You should really reconsider who's on your team if you don't think they're worth a generous equity grant. Thank you you

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How Much Equity to Give Your Cofounder - Michael Seibel