Co-Founder Equity Mistakes to Avoid | Startup School

Summary

This video, presented by Michael Cybal, provides advice on equity splits and co-founder dynamics for tech startups aiming for VC funding. The key takeaway is to be generous with co-founder equity, focusing on long-term motivation rather than short-term considerations. Topics covered include the importance of vesting and cliffs, the need for essential contributors, and guidelines for handling co-founder breakups. Cybal emphasizes that co-founders must be motivated for future work, and CEOs should ensure equity is used as a tool to inspire commitment and collaboration over the startup's journey.

Takeaways

• 😀 The video focuses on co-founder equity splits and breakups, specifically for tech software startups expected to be VC-funded.
• 🤔 Generosity with co-founder equity is encouraged to motivate the founding team, especially during the early, challenging years of a startup.
• 💡 The speaker advises against stinginess with equity, as it can lead to team members leaving when the startup is still in its nascent stages.
• 📉 The 'Jedi founder' and 'dumb founder' are both characterized by their generosity with equity, while the 'midwit' overcomplicates equity calculations.
• 🔄 Vesting and cliffs are important tools for equity distribution; they ensure equity is earned over time and protect the company if a founder leaves.
• 🛠 The founding team should be small but capable of building an MVP and getting it to customers, emphasizing the importance of essential co-founders.
• ⏳ Equity is meant to motivate future work, not just reward past contributions; the bulk of the work in a startup is often ahead, not behind.
• 🚫 The CEO should have the authority to let go of underperforming co-founders, regardless of equity split.
• 🤝 Co-founders should discuss and agree upon the terms of equity and potential breakups before they occur, especially pre-product market fit.
• ❌ Unequal equity splits due to reasons like 'I had the idea' or 'I started working earlier' are discouraged as they reflect short-term thinking.

Q & A

What is the main advice given for co-founder equity splits in tech startups?

The main advice is to be generous with co-founder equity, aiming to motivate the founding team to work hard, especially during the early, uncertain years of a startup.

Why is it recommended to avoid stinginess with equity in the early stages of a startup?

Stinginess with equity can cause key team members to leave during the critical early stages when the startup is still trying to achieve product-market fit, potentially derailing the entire venture.

What is the typical recommendation for equity distribution among co-founders?

It is recommended to go for close to equal equity splits, as this can help maintain motivation and commitment among co-founders.

What is the purpose of vesting and cliffs in equity distribution?

Vesting and cliffs are used to ensure that equity is earned over time and to protect the company in case a founder leaves before a certain period, typically one year, by allowing the company to reclaim unvested equity.

Why is it important to consider the essential nature of co-founders when distributing equity?

Equity should be distributed to those who are essential to the founding team, as defined by their contribution to building an MVP and getting it to customers, to ensure that only those who are truly necessary to the startup's success are included.

What should a CEO consider when deciding on the equity split for co-founders?

A CEO should consider how the equity split will motivate co-founders not just in the present but over the entire expected duration of their commitment to the company, which could span several years.

Why is it not advisable to have performance-based equity in early-stage startups?

Performance-based equity is not advisable because it's difficult to set clear goals in the early stages, and startups often pivot, making predefined performance metrics irrelevant.

What is the recommended approach if a co-founder leaves or is fired before the one-year cliff?

It's typical for a co-founder who leaves or is fired before the one-year cliff to receive only a token amount of equity, often between 2% to 5%, and may have to give back some equity.

How should a CEO handle the situation if they themselves are not performing or wish to leave the company?

If a CEO is not performing or wishes to leave, they should understand the expectations and processes similar to other co-founders, including potentially resigning from the board and relinquishing certain rights.

What is the rationale behind not considering part-time founders as full co-founders?

Part-time founders are not considered full co-founders because the commitment required to build a successful startup is significant, and part-time involvement is often incompatible with the level of dedication needed.

Why is it important to be generous with co-founder equity even if one founder stays with the company longer?

Being generous with co-founder equity is crucial because the early years of a startup are critical for value creation, and co-founders provide the initial momentum needed for the company to succeed, regardless of who stays longer.