How Much Equity Should Early Startup Team Members Get?

May 6, 2016 - 3 minutes read

In a particularly emotional segment of the popular podcast Startup by Alex Blumberg, two co-founders discuss how much equity each party “deserves” based on their skills and contribution to the company — and the huge disparity in what each considers fair almost tears the team apart.

The scene is particularly powerful because, rather than discussing the subject with each other directly, both co-founders reach equity split proposals independently through advising with their wives, friends, and mobile app development-savvy business associates. Blumberg, the original founder, suggests around 5% go to his business-savvy partner. Meanwhile, the partner believes he should receive at least half the company.

This huge split in opinion is, unfortunately, very common among early-stage startups we work with in our capacity as iPhone app developers here in NYC.

Part of the problem, as we see it, is the tendency to look at equity split in terms of skill division and creativity (namely, who had the original idea). Between founders, there is sometimes confusion over which skillset is more valuable: technical mobile app development, or business and marketing experience. In our opinion, if both roles are equally crucial to the company, they should be rewarded equally with something between and 30–70 and 50–50 split.

When it’s time to bring on more team members and investors, risk becomes a much better deciding factor: assuming everyone at the table this early in the game is integral to the company’s success, it’s important to remember that startups are essentially a gamble. A founder who’s receiving no monetary compensation (and sinking all profits back into the company) is essentially risking everything. Third-party and financially compensated iPhone app developers, on the other hand, are risking very little.

Similarly, a first engineering or marketing hire who’s accepting $20,000/year when established companies are offering them $80,000 is risking $60,000/year. While it makes sense to keep as much equity for the original founders as possible, it also makes sense to incentivize early hires.

For example, a fully-funded seed-stage startup will usually pay early hires industry-standard salaries and only offer 0.05–5% equity. This is often ideal since it frees up equity to dole out to angel investors and venture capital firms. However, if your company is truly “bootstrapped” and operating on little or no funding, employees will need significantly more share in the company to make it worth their time and risk. Other startups work around the question of equity altogether by partnering with established mobile app development companies.

Whichever approach your startup takes, the most important consideration is that everyone at the table is treated with respect, and walks away feeling valued and fairly compensated.

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