Interesting about the 50-50 split. If you talk to most people in the valley, they would probably tell you this is the worst thing you can do. That is, if you're looking from the perspective of a VC.
I've also read a bunch of articles that suggest unequal splits, and the reasons they cite seem to boil down to the idea that the split should reflect the proportional risk taken, and not much else. There are times when founders truly take the same amount of risk, and an even split is justified under the common VC thinking.
In my limited experience pitching to VCs, as someone in an even-split startup, I believe VCs do prefer to have a primary person responsible who is in the CEO seat and has authority to make unilateral decisions. I can imagine an uneven split makes it clear when that's the case. I'm certain many of them have seen cases where even split partnerships were made more difficult and ended up being unfair largely because of the even split. I'm also sure that there are cases where it's harder for them to communicate and negotiate with multiple founders rather than one.
Those reasons don't matter if you're not taking funding, so even split in a contracting partnership (even split effort), turned profitable product startup that doesn't deal with VCs makes a lot of sense.
I've done both equal and non-equal, but I've yet to have or observe a business where both the risk, contribution, and effort put in by the founders is actually equal.
Sometimes it's just a conversation founders want to avoid having because it's uncomfortable, but that in itself is a bit of a red flag.
I have no doubt you're right that it's frequently a red flag, and that founders often go equal to avoid ranking themselves.
I've also watched and been part of lots of partnerships where the expectation before hand was equal contribution, and the reality after the fact was lopsided. I feel fairly lucky that my most recent experience truly was equal risk and equal effort; my even split experience has been truly reflective of what's happened, and truly fair for both of us.
The big mistake I have made is giving people besides my co-founder too much equity. Nobody else who's contributed to my company so far other than my co-founder have lived up to what they said they'd do, and we gave out too much equity in advance of them doing it.
Considering that, and considering both the issue you brought up and the reasons YCombinator gives for pushing toward equality rather than away from it, I think the main thing founders need to do is have a mechanism for not committing equity in advance of the effort. It's important for founders to be on a vesting schedule so that when one stops contributing or contributes less for a long period of time, you can shut it off. And it's important to communicate that things are going off the rails, and then actually take the action to shut it off.
That's really basic and somewhat stating the obvious, but if you are diligent about cutting off people who don't contribute, then there's no reason to shy away from equal split plans in advance. My experience has been that people I've partnered with for equity aren't avoiding contribution maliciously, they simply and honestly didn't realize in advance that they don't have the time & energy they thought they did.
We're talking about a small consulting shop here at the start, where the paycheck comes form the actual work. Makes a lot of sense. No VC would touch that kind of business at that point anyway, not scalable.
Even later on, once they have a product, why would you change that? 50-50 is great, since you need both parties to agree to do something, which is essential in a small business like this.
VCs want to avoid the possibility of deadlocks when it comes to control - it's an easy box to check off when it comes to protecting the investment. But realistically, even at 51/49 or 60/40, if the disagreements are serious enough at an earlier stage the company is probably in a bad place anyway.
Being 3 founders is better, going into something that demanding like a startup on an uneven footing, is never going to work out, it will be a source of constant friction.
It's not the 50-50 split that's bad, it's the part where you don't talk about vesting. I have a friend who confounded a startup with another guy. It started with my friend agreeing to put in $20K and some advice, the other guy working full time, for a 50-50 split. After one year my friend has put in $200k+, worked full time building business, marketing, etc, while the other founder does his own job poorly.
They agree my friend deserves more equity, but can't agree between a 70-30 or 80-20 split, so other founder hires lawyer and holds my friend hostage for a lucrative buyout. Company is now worth significant amount of money almost solely to my friends hard work/investment, but legally he can't move forward until co-founder signs off on every decision.
I don't understand -- how would vesting have helped? If you can't fire the other person, vesting doesn't help when you have dead weight in the cap table. It sounds like the only remedy is your friend should have had hard conversations earlier when the other partner had less leverage...
Actually vesting would have reduced the other partners leverage greatly. First, they would not have been an LLC, would have already been a C Corp. The partner was refusing to sign the transfer docs so they could become a C corp to leverage outside investment, and give employees option agreements. If they had been a C corp, my friend would have gained more shares with every investment, and could fully control corporation decisions. Vesting also would have made it more clear to his partner how little equity he yet had, and more amenable to working together.
But outside my example, starting any new idea as a 50-50 partnership without vesting requirements is a terrible idea.
But even if they had been a C corp, vesting or no vesting, it sure sounds like they were both still employed so it still would have been a 50-50 equity split. Thus your friend couldn't have ordered anyone around? In order for vesting to help, someone has to be no longer employed and thus no longer accruing equity.
I'm not arguing against vesting, but I don't understand your example.
A C corp can compensate my friend with more stock i.e. voting control for his massive cash investments, an LLC is quite a bit harder when they are both partners.
Please expound, I feel like I understand some of the risks but am curious to hear your objections. I personally would prefer bootstrapping but I think there are times when a market is growing quickly and you don't want to be left on the sidelines.
Honestly I wouldn't take my opinion seriously, I have very little experience in industry and my opinion might be misinformed. But if you really care, I'm talking from an ethical perspective. Imagine if Facebook or Google or Twitter were successfully bootstrapped, think about how much better off everyone would be. If all you care about is making money then VC money probably would work I guess. But it makes me sad.
Do you think that the VC money is what drove them to behave in a way that you don't agree with? If so, how do you square that with the fact that they are now publicly traded and not subject to VC whims?
