What Are The Five Rules You Should Follow To Divide Up Your Founder Equity?

“How much equity do you think I should give “Frank?” That was the question “Sam”, the cofounder of the company asked me last week. He was considering bringing Frank on as a late cofounder to the company.

“I’ve drawn up a spreadsheet breaking the equity up between the three of us. Take a look and tell me what you think.”

I looked at the spreadsheet Sam had drawn up and I smiled. Sam, in my opinion had done something really smart:

Rule number one in dividing cofounder equity: You need to separate your equity as an investor from your equity as a cofounder.

Sam put about $100,000 of his own money into financing the company. He was the only investor in the company and he was the CEO.

The roles, and equity allocation, of a CEO and an investor are different. You need to acknowledge the difference.

Yeah, I know I said the same thing as I did in rule number one again, but it’s worth repeating. Let me explain what Sam did.

Sam felt (right or wrong) that his $100,000 investment in the company was worth 15% ownership in the company. That’s separate from his equity as CEO.