How to Determine Equity for Co-Founders & Early Employees

Deciding how much equity to give co-founders and early employees is crucial for building a fair, motivated, and sustainable startup team. Here’s a breakdown of the key factors and methods to help you make informed decisions.

🔍 Factors to Consider When Splitting Equity

1️⃣ Contribution & Commitment Levels

💼 Who is working full-time vs. part-time?
🕒 Who is investing the most time and effort into the company?
💰 Who is contributing financially (cash, equipment, office space)?

📌 Example: A co-founder working full-time deserves more equity than one contributing only ideas or part-time work.

2️⃣ Founding Roles & Responsibilities

🔹 CEO / Visionary – Typically gets more equity for leading the company.
🔹 Technical Founder (CTO) – Essential for building the product.
🔹 Operations, Marketing, Sales – Critical for growth but may get less than tech founders.

📌 Example: If one founder is building the product (70%), and the other is handling marketing & sales (30%), equity can reflect that.

3️⃣ Risk & Opportunity Cost

🛑 Who is leaving a high-paying job to work full-time?
💸 Who is investing personal savings?
⏳ Who is taking on the most long-term risk?

📌 Example: A co-founder who quits a $150K salary job may deserve more equity than one working part-time.

4️⃣ Stage of Joining

🚀 Early-stage co-founders (pre-product, pre-revenue) usually get larger equity.
📉 Late-stage employees get less equity but may receive salaries & bonuses.

📌 Example: A technical co-founder joining pre-funding may get 20-30%, while an early engineer joining post-seed funding may get 0.5-2%.

📊 Methods to Divide Equity

1️⃣ Equal Split (50/50, 33/33/33, etc.) – Simple, but Not Always Fair

✔️ Best for: Two co-founders with equal contributions & risk.
❌ Risk: One may contribute more but receive the same share.

📌 Example: Two co-founders quit their jobs, invest savings, and work full-time—a 50/50 split makes sense.

2️⃣ Dynamic Equity Splitting (Slicing Pie Method)

🔹 Adjusts equity based on actual contributions over time.
🔹 Uses a formula considering time, effort, money, and resources invested.
🔹 Fair for changing commitments & unforeseen circumstances.

📌 Example: If a co-founder reduces involvement, their equity share is adjusted accordingly.

3️⃣ Vesting & Cliff Period (Prevents Early Departures)

✅ 4-year vesting schedule + 1-year cliff (industry standard).
🛡 Ensures co-founders earn equity over time rather than upfront.
🚨 If someone leaves before 1 year, they get nothing (prevents unfair early exits).

📌 Example: A co-founder with 10% equity earns 2.5% per year over 4 years.

📈 Equity Guidelines for Early Employees

📌 Example: A first engineer joining at a seed stage might get 1-2% equity, while an engineer joining after Series A might get 0.1-0.5%.

🚀 Final Takeaways

✔ Consider contributions, risk, and timing when deciding equity.
✔ Use vesting schedules to protect the company from early departures.
✔ Be transparent with co-founders and employees about equity decisions.

💡 Pro Tip: Use equity calculators or consult a startup lawyer to ensure fairness!