This is such a common question here and elsewhere that I will attempt
to write the world's most canonical answer to this question. Hopefully
in the future when someone on answers.onstartups asks how to split up
the ownership of their new company, you can simply point to this
The most important principle: Fairness, and the perception of
fairness, is much more valuable than owning a large stake. Almost
everything that can go wrong in a startup will go wrong, and one of
the biggest things that can go wrong is huge, angry, shouting matches
between the founders as to who worked harder, who owns more, whose
idea was it anyway, etc. That is why I would always rather split a new
company 50-50 with a friend than insist on owning 60% because "it was
my idea," or because "I was more experienced" or anything else. Why?
Because if I split the company 60-40, the company is going to fail
when we argue ourselves to death. And if you just say, "to heck with
it, we can NEVER figure out what the correct split is, so let's just
be pals and go 50-50," you'll stay friends and the company will
Thus, I present you with Joel's Totally Fair Method to Divide Up The
Ownership of Any Startup.
For simplicity sake, I'm going to start by assuming that you are not
going to raise venture capital and you are not going to have outside
investors. Later, I'll explain how to deal with venture capital, but
for now assume no investors.
Also for simplicity sake, let's temporarily assume that the founders
all quit their jobs and start working on the new company full time at
the same time. Later, I'll explain how to deal with founders who do
not start at the same time.
Here's the principle. As your company grows, you tend to add people in
The top layer is the first founder or founders. There may be 1, 2, 3,
or more of you, but you all start working about the same time, and you
all take the same risk... quitting your jobs to go work for a new and
The second layer is the first real employees. By the time you hire
this layer, you've got cash coming in from somewhere (investors or
customers--doesn't matter). These people didn't take as much risk
because they got a salary from day one, and honestly, they didn't
start the company, they joined it as a job.
The third layer are later employees. By the time they joined the
company, it was going pretty well.
For many companies, each "layer" will be approximately one year long.
By the time your company is big enough to sell to Google or go public
or whatever, you probably have about 6 layers: the founders and
roughly five layers of employees. Each successive layer is larger.
There might be two founders, five early employees in layer 2, 25
employees in layer 3, and 200 employees in layer 4. The later layers
took less risk.
OK, now here's how you use that information:
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the
company, split equally among everyone in the layer.
Two founders start the company. They each take 2500 shares. There are
5000 shares outstanding, so each founder owns half.
They hire four employees in year one. These four employees each take
250 shares. There are 6000 shares outstanding.
They hire another 20 employees in year two. Each one takes 50 shares.
They get fewer shares because they took less risk, and they get 50
shares because we're giving each layer 1000 shares to divide up.
By the time the company has six layers, you have given out 10,000
shares. Each founder ends up owning 25%. Each employee layer owns 10%
collectively. The earliest employees who took the most risk own the
Make sense? You don't have to follow this exact formula but the basic
idea is that you set up "stripes" of seniority, where the top stripe
took the most risk and the bottom stripe took the least, and each
"stripe" shares an equal number of shares, which magically gives
employees more shares for joining early.
A slightly different way to use the stripes is for seniority. Your top
stripe is the founders, below that you reserve a whole stripe for the
fancy CEO that you recruited who insisted on owning 10%, the stripe
below that is for the early employees and also the top managers, etc.
However you organize the stripes, it should be simple and clear and
easy to understand and not prone to arguments.
Now that we have a fair system set out, there is one important
principle. You must have vesting. Preferably 4 or 5 years. Nobody
earns their shares until they've stayed with the company for a year. A
good vesting schedule is 25% in the first year, 2% each additional
month. Otherwise your co-founder is going to quit after three weeks
and show up, 7 years later, claiming he owns 25% of the company. It
never makes sense to give anyone equity without vesting. This is an
extremely common mistake and it's terrible when it happens. You have
these companies where 3 cofounders have been working day and night for
five years, and then you discover there's some jerk that quit after
two weeks and he still thinks he owns 25% of the company for his two
weeks of work.
Now, let me clear up some little things that often complicate the
What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the
answer is simple: the investment just dilutes everyone.
Using the example from above... we're two founders, we gave ourselves
2500 shares each, so we each own 50%, and now we go to a VC and he
offers to give us a million dollars in exchange for 1/3rd of the
1/3rd of the company is 2500 shares. So you make another 2500 shares
and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's
all there is to it.
What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money
saved up, so she decides to go without a salary for a while, while the
other founder, who needs the money, takes a salary. It is tempting
just to give the founder who went without pay more shares to make up
for it. The trouble is that you can never figure out the right amount
of shares to give. This is just going to cause conflicts. Don't
resolve these problems with shares. Instead, just keep a ledger of how
much you paid each of the founders, and if someone goes without
salary, give them an IOU. Later, when you have money, you'll pay them
back in cash. In a few years when the money comes rolling in, or even
after the first VC investment, you can pay back each founder so that
each founder has taken exactly the same amount of salary from the
Shouldn't I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to
pay someone in equity for an idea. If one of you had the idea but you
both quit your jobs and started working at the same time, you should
both get the same amount of equity. Working on the company is what
causes value, not thinking up some crazy invention in the shower.
What if one of the founders doesn't work full time on the company? Then they're not a founder. In my book nobody who is not working full
time counts as a founder. Anyone who holds on to their day job gets a
salary or IOUs, but not equity. If they hang onto that day job until
the VC puts in funding and then comes to work for the company full
time, they didn't take nearly as much risk and they deserve to receive
equity along with the first layer of employees.
What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in
cash or IOUs, not shares. Figure out the right price for that computer
they brought with them, or their clever word-processing patent, and
give them an IOU to be paid off when you're doing well. Trying to buy
things with equity at this early stage just creates inequality,
arguments, and unfairness.
How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end
up owning more than 50%, the founders are going to feel like
sharecroppers and lose motivation, so good investors don't get greedy
that way. If the company can bootstrap without investors, the founders
and employees might end up owning 100% of the company. Interestingly
enough, the pressure is pretty strong to keep things balanced between
investors and founders/employees; an old rule of thumb was that at IPO
time (when you had hired all the employees and raised as much money as
you were going to raise) the investors would have 50% and the
founders/employees would have 50%, but with hot Internet companies in
2011, investors may end up owning a lot less than 50%.
There is no one-size-fits-all solution to this problem, but anything
you can do to make it simple, transparent, straightforward, and,
above-all, fair, will make your company much more likely to be
The above awesome answer came from the Stack Exchange beta site for startups, which has now closed. I expect that this equity distribution question (which is strongly tied to personal finance) will come up more times in the future so I have copied the content originally posted.