How Do You Divide Equity When You & Your Cofounders Are Investing?
It’s great that you and your cofounder are both investing more money in your company. That’s a sign of true commitment.
Let me ask you a question? Why is your money worth more than your cofounder’s money?
The answer is obvious. Your money and your cofounder’s money is worth the same amount because you are acting as investors, not cofounders. Here’s another way to think about things.
What if you and your cofounder didn’t have $50K, and you had to raise the money from investors?
The investors you found would obviously each get the same percentage ownership in the company. Period.
And that’s exactly what you should do in this case. You’re acting as investors in this case, but that doesn’t mean you each will own the same amount of the company because your employee responsibilities differ.
You need to split up your equity into an investor bucket and an employee bucket.
We’ve already covered the investor bucket. Now let’s look at the employee bucket.
You and your cofounder agree on a 60/40 split. You’re getting 60% as the CEO, and your cofounder is getting 40%.
That’s a pretty reasonable split, and it seems within the bounds of fairness. Just remember that your equity as founders should vest over time.
The typical vesting schedule is a one year cliff (meaning nothing vests for the first 12 months) followed by the rest of equity vesting monthly or quarterly for the next 36 months.
How does your role as investors effect your ownership?
Let’s say that you agree that the $50K investment is worth 10% of the company. That means that you and your cofounder will each be diluted by 10%.
Here’s how this will look:
Pre Investment Ownership:
CEO: 60%
Cofounder: 40%
Post Investment Ownership:
CEO: 60%x0.9 = 54% + 5% = 59%
Cofounder: 40%x0.9 = 36% +5% = 41%
So your cofounder’s ownership will increase by 1% and your ownership will decrease by 1%. Oh, and one more thing:
Your equity as an investor doesn’t have a vesting schedule.
You should have your lawyer draft up the appropriate documents, so everything is done properly. But the end result is you and your cofounder are now investors and employees of your company.
You and your cofounder own 5% each of the company as investors. Investors equity, unlike your equity as a cofounder, doesn’t vest. That’s as it should be.
For more, read: Five Reasons Why You Should Avoid Raising Venture Capital
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