As an entrepreneur, I am addicted to making a prototype, coming up with a company name, building a website and bouncing ideas off experts. You probably feel the same way. These are all fundamental steps to turn an idea into a startup, and great founders constantly strive to improve these steps through self-help resources and/or schooling.
However, a couple times in the past I have skipped an important early step. When skipped, this step can become a problem. I want to help you handle this step. It’s something that isn’t always taught in your business classes. This big critical task is setting up strong cofounder dynamics and dividing equity. I’m writing this from what I have learned in my experiences in the hopes that it can help other fellow entrepreneurs make smart decisions when they build their startup. The sad truth is, there are always a handful of cases where great ideas can die simply because of cofounder differences.
Why Do we Need Cofounders?
First off, why do some startups have cofounders and some don’t? It’s not my intent to say which system is better or not, because really there is no right answer. But here are some quick pro’s and cons I have found to having cofounders versus going solo.
Pros to having cofounders:
- Complementary skills. Think Jobs and Woz in the early Apple days.
- Dividing up work. Theoretically, two people equals double the work hours or three people triple!
- New ideas and better decision-making. More brains, more experiences, more opinions.
- Enjoying the ups together and enduring through the downs together in the entrepreneurial emotional rollercoaster.
Cons to having cofounders:
- Freezing up equity early into the startup. Dividing up large chunks of equity on day one to multiple cofounders can make your startup difficult to take on investor capital in the future.
- Sometimes slower decision-making. Analysis paralysis can occur when nobody can agree on something. Too much time spent going back and forth.
- The opportunity for disputes. Disputes among cofounders can only happen if you have them.
If you are wondering if you need a cofounder or not, just know that every startup has its own situation. I have experience with both. It is up to you to assess what skills and efforts are required to reach your next milestone. For this next topic lets assume that yes, you have decided that you need a cofounder with complementary skills to join you in your journey. And let’s assume that you’ve found one already. Even better!
How to Approach Equity
I can personally tell you that this can be a touchy subject. I have found the best way is to gather all founder members involved, and discuss it in person. Don’t have this conversation over text, email or instant message. If you do, then things are more likely to get personal and ugly. One major thing I have learned in my experience is that you need to tackle the conversation of equity as early as you can and in the most professional matter as possible. When I have started startups in the past, none of us cared about who owns what percentage of the company when you have no product, $0 in revenue, zero customers and no assets. But then once the business has a little bit of value, then you’re going to wish that you set up a system in the early days. I am not recommending that you spend $1000 to have a professional draft a thorough operating agreement, but have at least something.
Categories to Consider when Dividing
There are tons of methods to figure out how to divide up equity. One notable one out there I have found is “Slicing the Pie.” Even if you don’t use their method front to back, looking at it will at least help you brainstorm some methods for your own system. I have developed my own method in my experience at my house-cleaning company, Utah Maids, and other ventures I’ve been involved in. So far it has worked out pretty well. It’s in no way a perfect method, but it’s quick and is much better than nothing. Here are the top categories we discuss when we come up with an equity agreement:
- Amount of money invested. This is, in my opinion, one of the most important categories. If there are three founders, and one invests $10k and the other two invest $1k, it would make sense that equity is not split evenly.
- Amount of time invested. Is everybody quitting their jobs and school to do this full time? Is everybody working on this together as a side project? Ask each other this. Your team doesn’t need to be clocking in and clocking out, but you need to have the conversation about who will be putting what amount of time, and at what point will everybody go all-in on this startup. If one cofounder wants this idea to be a “4-Hour Work Week” lifestyle business and the other cofounder wants the idea go get acquired by Google, then you may run into problems.
- Skills/education brought to the team. This category is very situational. It also has the opportunity to get ugly, so it needs to be kept professional. You need to talk as a group about what skills are being brought to the table. If your business has one and only one key programmer with five years of experience to build your platform or app, then that may be leverage for a slight bit more equity.
- Whose idea it was. Truthfully, this category doesn’t always carry as much weight as you may think. If the idea is to “start a house-cleaning company,” then it really isn’t anything all that new. If the idea is sincerely innovative, then it may carry a bit more weight for whoever came up with it. However, I have learned that there is no shortage of good business ideas. The key is 100 percent day-to-day nonstop hard work. An idea is worthless if you don’t act upon it.
Your cofounder team will need to practice how to effectively have tough conversations. Entrepreneurship is all about making hard decisions and having tough conversations. This is your first test.