Do you know how to split equity in a startup? According to experts like Noam Wasserman and Peter Thiel, equity distribution should reflect each founder’s actual contributions, rather than emotional factors or assumptions about future value. The process requires balancing objective assessments with strategic timing decisions.
Splitting startup equity presents one of the most critical challenges for new ventures because it directly impacts motivation, fairness, and long-term success. This article will help you navigate this complex decision and create an equity structure that rewards contributions fairly while protecting your company’s future.
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Equity Split Strategies
According to Noam Wasserman’s The Founder’s Dilemmas, founders’ decisions on splitting equity in a startup should be based on the value each person brings to the venture through their skills, ideas, contributions, and financial capital. He observes that idea originators often feel entitled to larger equity stakes—but they typically need partners with technical or operational expertise to transform concepts into viable businesses. These “implementers” can leverage their essential role to negotiate for significant equity.
Similarly, founders who take on the CEO position or contribute more financially to the startup usually secure larger portions of ownership. Wasserman strongly recommends that equity distribution should be determined by the objective value each founder contributes, rather than by emotional factors. He cautions against allowing personal relationships between founders to cloud judgment—arguing that even close friends or family members should receive equity proportionate to their actual contributions to avoid future conflicts and resentment.
In Zero to One, Peter Thiel cautions you not to overpay your CEO. In his view, paychecks motivate people only in the short term, because pay is derived from the present value of the company, not its future value. This can be especially problematic at the executive level since it’s crucial to have a CEO with a vision for building the company’s future. Paying your CEO too much can undermine her motivation to do whatever it takes to reach the company’s long-term goals.
Additionally, the CEO’s pay sets the standard for startup salaries for the rest of the company: If she draws a fat paycheck, her subordinates will expect proportionally high compensation. If she covers up problems to make the current situation look better and thereby protect her short-term interests, her subordinates will do likewise. But if she addresses problems head-on and works for the company’s growth in the hope of future rewards, this may inspire her subordinates to do the same.
| Navigating Startup Equity Distribution As Wasserman writes, determining the right distribution of equity requires frank discussions that extend well beyond current skills and contributions. These conversations should encompass each founder’s expectations, risk tolerance, and long-term commitment plans. Consider how different risk profiles might affect decision-making: Could a founder with low risk tolerance hold the company back from bold moves if they have a large equity stake to protect? Conversely, might a founder with high risk tolerance use their significant equity position to push potentially rash decisions through? You’ll also need to discuss each founder’s future plans and how life changes might impact their involvement. For instance, if you anticipate that one founder’s time commitment will decrease significantly as their family grows, an initially equal split may feel unfair to those whose dedication remains constant. From these comprehensive discussions, three primary equity models typically emerge: The equal split (50-50, 33-33-33, etc.), which tends to work in situations where founders contribute relatively equally The junior co-founder model, in which one person conceives the idea and brings in others with specialized skills, with these secondary founders typically receiving 5-20% equity stakes The senior controlling partner approach, which gives slightly more equity (51-49% or 60-40%) to one founder who may have originated the business concept, serves as CEO, or provided initial funding |
Similarly, Thiel argues that offering employees high salaries or cash bonuses makes them more prone to focus on looking good in the short term rather than making the company prosper in the long term.
He says that it’s better to reward employees with equity in the company because it gives them a stake in the company’s future. However, he concedes that it is difficult to distribute equity in a way that seems fair to everyone. Typically, employees who start earlier get larger shares of equity. This is fair in the sense that these employees took a greater risk in joining the company, but it doesn’t necessarily scale with their contributions to the company’s success: the company’s first janitor might end up owning more stock than the engineering manager who was hired a few years later to scale up their production operations. He recommends keeping the allocation of equity confidential to prevent it from becoming a source of resentment between employees.
Timing the Equity Split
When should you split the equity? The timing presents another dilemma because, as Noam Wasserman writes, there are advantages and drawbacks both to splitting the equity early as well as to doing it later in the company’s life cycle.
The Advantages of an Early Equity Split
According to Wasserman, early equity splits—when the company’s valuation is still low—are typically less complicated and contentious. That’s because at this stage, the founders’ reputations, financial risks, and commitment to the venture are more or less comparable, making it fairly agreeable to allocate equity.
(Shortform note: Despite these advantages, early equity splits can create serious long-term problems for startup founders. When cofounders divide company ownership too early, they often don’t account for how future rounds of investment will drastically reduce their stakes—sometimes from 100% ownership to just 15% after a few funding rounds. Early splits can also create complex tax issues, requiring founders to file special paperwork within 30 days or face hefty penalties. Most problematically, early splits can leave insufficient equity to attract key employees and investors later, potentially killing the startup’s growth prospects.)
The Drawbacks of an Early Equity Split
According to Wasserman, splitting equity too early after company formation can mean that founders lack crucial information about each member’s actual value, commitment, and contributions, leading to potentially unfair allocations. On top of that, people’s roles within the company change over time, and an early equity split might not accurately capture the evolution of responsibilities as founders leave the business or reduce their involvement.
| Revising the Equity Split as the Company Grows Although the risks of not knowing what each founder’s subsequent contributions will be are real, it’s possible for startups to make early equity splits work by using flexible systems that adjust based on actual contributions over time. Some startups now adopt dynamic equity splits that adjust based on ongoing contributions, rather than projections or early assumptions, making the process more transparent and fair. One method known as the “Slicing Pie” model tracks everything founders contribute—time, money, ideas, relationships, equipment—and assigns “slices” based on fair market value. For every dollar in cash contributed, founders get four slices; for non-cash contributions like unpaid work, they get two slices. Startups can also establish “contribution windows” (such as 2-3 year periods) when equity calculations adjust dynamically before locking in. Vesting schedules with four-year terms and one-year cliffs protect the company if founders leave early. Investors typically view this approach positively because each founder gets equity proportional to their actual contribution. |
The Advantages of a Later Equity Split
Wasserman highlights that delaying some equity allocation decisions can create opportunities for employees who join after the company’s initial founding. Rather than distributing all equity among the original founders, reserving a portion for future team members allows later hires to receive stakes in the company that can significantly appreciate in value. These equity reserves are called option pools.
As the company grows and attracts investment capital, even relatively small equity percentages granted to these employees can become quite valuable. This approach benefits both the organization (by creating powerful incentives to attract talent) and the employees themselves (who may join a company that already has traction and therefore face less risk than the original founders did).
| The Risks of Option Pools In Venture Deals, venture capitalists Brad Feld and Jason Mendelson outline some of the risks associated with option pools. According to Feld and Mendelson, creating an option pool increases the total number of shares your company has, which dilutes existing shares—including those held by founders and current investors—since each share now represents a smaller percentage of ownership. This dilution impacts company valuation and investment negotiations in two key ways: First, it lowers the pre-money valuation (the amount at which investors value your company before making their investment) because you increase the number of your company’s shares without adding any new capital. Second, it affects how investors calculate what percentage they’ll receive in exchange for their investment. Since investors often insist on expanding the option pool before investing, founders frequently end up owning a smaller percentage of their company as a result of this pre-investment dilution. |
The Drawbacks of a Later Equity Split
However, Wasserman warns, waiting too long also has risks. He says that if founders stall the equity division until the business has grown, the negotiations can become more complex. As the company’s value increases, so does each equity share’s worth. This makes the division more critical because the stakes are higher. It may lead to disagreements among co-founders or partners over their contributions’ perceived value and the corresponding equity they deem fair. Ultimately, unsettled equity allocations may sow seeds of resentment or apathy among partners, potentially disrupting the company’s operation. Some partners may be reluctant to fully commit to the company if they’re unsure what their equity rewards will be.
| Tools and Methods to Time the Equity Split Experts note the common timing issues that plague equity splits: premature allocation, static arrangements that don’t adapt as roles evolve, and an inability to accommodate changing life circumstances or business pivots. To address these challenges and to help manage equity splits that happen later in the life of the company, experts recommend incorporating accountability mechanisms like vesting provisions, where founders earn equity over time or after meeting specific milestones. Additionally, clearly defining expectations and consequences for changing circumstances helps to maintain fairness. This more dynamic approach views equity not as a fixed pie but as an inverted “tiered cake,” with new layers of value added and divided differently over time based on evolving contributions. This requires regular, open communication about the value being created by each founder. Several tools are available to help founders create more effective equity arrangements, including: Gust: A free tool that recommends equity splits based on value contribution assessments Co-Founder Equity Calculator: An experimental calculator that suggests equity splits based on founder inputs |
Check Out More on Splitting Equity in a Startup
If you want to further learn how to split equity in a startup, you can read the full guides to the books mentioned above:
