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Co-Founder Equity Mistakes to Avoid | Startup School
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In order to get your startup off the ground it's critical to keep your co-founders motivated. One of the best ways to do that is to figure out a fair co-founder equity split. In this episode of Startup School, YC Group Partner Michael Seibel explains the ins and outs of co-founder equity, why it's important to be generous with that equity, and how to avoid bad advice that can lead to co-founder breakups. Apply to Y Combinator: https://yc.link/SUS-apply Work at a startup: https://yc.link/SUS-jobs Chapters (Powered by https://bit.ly/chapterme-yc) - 00:00 - Intro 02:03 - Co-founder equity split 06:39 - Co-founders break-up 09:42 - Bad reasons for very unequal equity splits 14:06 - Common bad advice 17:14 - Final thoughts
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The Importance of Generosity in Equity Splits
Michael Seibel emphasizes the critical role of being generous with co-founder equity in tech startups. He explains that motivating the founding team during the challenging early years is essential for success. Seibel warns against being stingy with equity, as it can lead to co-founder departures when the company is still in its infancy.
"hello I'm Michael cybal 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 ..."
Equity Distribution Strategies
In this segment, Seibel discusses the best practices for distributing equity among co-founders. He advocates for close to equal equity splits to maintain motivation and prevent resentment among team members. The importance of vesting and cliffs in equity agreements is also highlighted as a way to protect the company and its founders.
"Equity um 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 t..."
Vesting and Cliffs: Essential Tools
Seibel explains the concepts of vesting and cliffs in equity agreements, emphasizing their necessity for all founders. He argues that these tools help manage expectations and protect the company from potential co-founder breakups. The segment outlines how vesting schedules can motivate co-founders to stay committed over time.
"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 Founde..."
Identifying Essential Co-Founders
This segment focuses on the importance of having essential co-founders in a startup. Seibel discusses how being generous with equity can help identify and retain key contributors while also allowing for the removal of non-essential co-founders. He stresses that the co-founder title should not be given lightly.
"cap table so you should be using vesting in 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 ..."
Guidelines for Co-Founder Breakups
Seibel provides guidelines for handling co-founder breakups, particularly in pre-product market fit scenarios. He outlines typical equity retention for founders who leave or are fired, emphasizing the need to motivate remaining team members and ensure the company's success.
"Founders who are not performing and so however you set up the equity split the CEO should Reserve this right and honestly there has to be a captain of the ship there has to be someone who's ultimately..."
Bad Reasons for Unequal Equity Splits
In this segment, Seibel discusses common misconceptions that lead to unequal equity splits among co-founders. He warns against short-term thinking and highlights the importance of considering long-term motivation and contributions when determining equity distribution.
"fired they leave with no more than 5% of the company which often means they have to give back some Equity now this can be a tricky conversation but when a company's pre-product market fit once again s..."
Common Bad Advice on Equity
Seibel critiques prevalent bad advice regarding equity distribution, such as performance-based equity and the treatment of part-time founders. He argues that these approaches can undermine motivation and clarity among co-founders, advocating instead for established best practices.
"most common bad reason for a massively unequal Equity split is well my co-founder agreed you know I own 90% of the company I asked my co-founder if they're willing to own 10 they said yes so everythin..."
Long-Term Thinking in Equity Distribution
Seibel concludes by emphasizing the importance of long-term thinking in equity distribution. He reflects on how successful founders prioritize co-founder motivation and the early contributions of their team, arguing that generosity in equity can lead to greater success in the long run.
"so let's move on to some common uh let's say bad advice that I see right so if our advice ISS hey you should be generous with your co-founder Equity um you want to motivate people for the long term an..."