YC
Co-Founder Equity Mistakes to Avoid | Startup School
@ Y Combinator
08/16/24
Takeaways
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Michael Seibel
08/16/24
@ Y Combinator
Be generous with co-founder equity to motivate your founding team during the challenging early years of a startup.
MS
Michael Seibel
08/16/24
@ Y Combinator
The biggest mistake is being stingy with equity, which can lead to co-founders leaving when things get tough.
MS
Michael Seibel
08/16/24
@ Y Combinator
When distributing co-founder equity, consider not just immediate contributions but also long-term motivation over the entire vesting period.
MS
Michael Seibel
08/16/24
@ Y Combinator
Aim for close to equal equity splits among co-founders to maintain motivation and prevent resentment.
MS
Michael Seibel
08/16/24
@ Y Combinator
Equity should vest over time, meaning co-founders earn their shares gradually, and cliffs ensure they must stay for a minimum period to receive any equity.
MS
Michael Seibel
08/16/24
@ Y Combinator
Implementing vesting and cliffs protects the cap table and allows for smoother transitions if a co-founder needs to leave.
MS
Michael Seibel
08/16/24
@ Y Combinator
Your co-founders should be essential to the founding team, representing the smallest number of people needed to build a minimum viable product (MVP), and be generous with equity to motivate co-founders and ensure essential team members remain engaged.
MS
Michael Seibel
08/16/24
@ Y Combinator
The co-founder title should not be given out indiscriminately; having too many co-founders can indicate unresolved issues within the team.
MS
Michael Seibel
08/16/24
@ Y Combinator
When distributing co-founder equity, remember that most of the work has yet to be completed, so equity should motivate future contributions rather than reward past efforts.
MS
Michael Seibel
08/16/24
@ Y Combinator
The CEO must have the authority to fire underperforming co-founders, ensuring accountability and effective leadership within the team.
MS
Michael Seibel
08/16/24
@ Y Combinator
If a co-founder leaves or is fired before their one-year cliff, it's typical for them to receive only a small amount of equity, usually between 2% to 5%.
MS
Michael Seibel
08/16/24
@ Y Combinator
When a founder is fired, it's reasonable to provide a small severance package, typically one to three months, but this is less common if they leave voluntarily.
MS
Michael Seibel
08/16/24
@ Y Combinator
Every founder, regardless of their departure circumstances, should resign from the board and sign a release, allowing remaining founders to manage voting rights effectively.
MS
Michael Seibel
08/16/24
@ Y Combinator
In cases of unequal equity splits, a common mistake is assuming that one co-founder deserves a significantly larger share simply because of an agreement, which can lead to imbalances and conflicts.
MS
Michael Seibel
08/16/24
@ Y Combinator
As a CEO, I need to think about what will keep my co-founder motivated during tough times, not just what makes them happy today.
MS
Michael Seibel
08/16/24
@ Y Combinator
I should be more generous with equity to ensure my co-founder remains motivated when challenges arise.
MS
Michael Seibel
08/16/24
@ Y Combinator
Having an idea is not a valid reason for a 90-10 equity split; execution is what truly matters in a startup.
MS
Michael Seibel
08/16/24
@ Y Combinator
The difference of starting six months earlier is often insignificant compared to the amount of work left to be done in a startup journey.
MS
Michael Seibel
08/16/24
@ Y Combinator
Salary and equity should be considered separately; salary is for living expenses, while equity motivates hard work and commitment.
MS
Michael Seibel
08/16/24
@ Y Combinator
I should ensure that every founding team member receives a salary they need to live, while also providing them with equity to motivate their hard work.
MS
Michael Seibel
08/16/24
@ Y Combinator
Experience alone does not justify a larger equity share; a co-founder must be a key contributor to the team.
MS
Michael Seibel
08/16/24
@ Y Combinator
Fundraising does not guarantee success; most startups that raise money do not achieve significant revenue.
MS
Michael Seibel
08/16/24
@ Y Combinator
The first launch of a minimum viable product (MVP) is just the beginning of the startup journey.
MS
Michael Seibel
08/16/24
@ Y Combinator
The best founders think long-term, considering not only their own needs but also those of their co-founders, even if the co-founders are not thinking about them.
MS
Michael Seibel
08/16/24
@ Y Combinator
Equity should be viewed as a tool to motivate the team, not something to hoard.
MS
Michael Seibel
08/16/24
@ Y Combinator
I advise being generous with co-founder equity to motivate for the long term and to protect oneself in the process. Performance-based equity is a bad idea because it's difficult to set clear goals at the beginning of a tech startup, and those goals often change as the company pivots.
MS
Michael Seibel
08/16/24
@ Y Combinator
Part-time founders shouldn't be considered true founders; successful companies typically don't have part-time founders, and full-time commitment is essential.
MS
Michael Seibel
08/16/24
@ Y Combinator
Dynamic equity agreements can be confusing and demotivating; founders are more motivated when they know exactly what equity they have from the start.
MS
Michael Seibel
08/16/24
@ Y Combinator
If a founder relationship isn't working out, that founder should leave or be fired before the vesting cliff, as this protects the remaining team and ensures accountability.
MS
Michael Seibel
08/16/24
@ Y Combinator
The first four to six years of a tech startup are critical for value creation, and even if one founder stays longer, it's important to share equity generously with co-founders who contributed to the startup's early success.
MS
Michael Seibel
08/16/24
@ Y Combinator
Being generous with co-founder equity is crucial because co-founders provide the initial energy and activation needed for the company to succeed, especially in the early years.