How To Allocate Founder and Employee Equity

Joel Spolsky, co-founder and CEO of our portfolio company Stack Exchange, posted an excellent answer to the question in the title of this post on the Stack site OnStartups.

I'm not going to reblog the entire answer here. I'd encourage you to go read Joel's answer. However, I am going to highlight some of the most important points from Joel's post:

  • Fairness, and the perception of fairness, is much more valuable than owning a large stake.
  • Before factoring in dilution from investors, 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. [go read Joel's answer to understand how he sets up these layers]
  • It never makes sense to give anyone equity without vesting.
  • Ideas are pretty much worthless.
  • Nobody who is not working full time counts as a founder.

The thing I love the most about Joel's post is he throws darts into a lot of conventional wisdom about founder equity allocation. I particularly like his notion that the person with the idea should not command a premium on equity allocation.

What Joel's post makes clear is that founder equity should be for services to be rendered in the tough initial year(s) when the risk is highest and capital (ie cash comp) is nonexistent. It is not for coming up with the idea, writing a patent, or going without a salary.

And I second with emphasis the focus on fairness. Founding teams that allocate the founders equity fairly stay together a lot more than founding teams where one founder has a much better deal than the others. The same is true of venture capital firms. The most stable venture partnerships are those where the partners share in the carry equally or near equally. At the end of the day, this is as much about respect as it is about money. And when people feel disrespected, they are going to leave at some point.

Great post by Joel. I'm looking forward to the disqussion on this one.