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Slicing the Pie – Startup Equity Split

With so many other things to occupy your time in a new startup , agreeing upon an equity split with your co-founders may not rank high on the priority list. However if history teaches us anything, then it probably should.

We only need to look at the Winklevoss-Zuckerberg Facebook situation or the currently unfolding Brown-Spiegel-Murphy Snapchat debacle to realise that a civilised conversation, captured in writing, can solve a lot of problems further down the track (OK possibly not as relevant in NZ, but hey, we can dream big). More importantly though, what it does is let everyone know where they stand in the startup.

So how do we slice this pie? If all things were equal then it would be a straightforward process of dividing the pie into nice equal servings. However things are rarely straightforward in a startup, and there are many factors we must consider about said pie:

Fortunately, there are many great tools available to founders to aid in the pie slicing process. A quick google search will turn up a tonne of results, so instead of talking about all of them I’m going to point you at two tools I’ve found particularly useful for splitting equity in the startup I’m currently working on.

The first is the Co-Founder Equity Calculator.  It is a quick and easy method for getting to a ballpark figure for what each of your co-founders contributions are worth. It’s a purely qualitative method for reaching equity splits. If you find that the result ‘feels’ about right, thats because its based on three years of startup research by Marc Harrison.

The second is a book called Slicing Pie by Mike Moyer. Slicing Pie approaches the equity split from a quantitative perspective and is based on the opportunity cost to each of the co-founders in undertaking the venture. Mike has kindly provided the Grunt Fund Calculator, an excel spreadsheet based on the model in the book, download it and start having a play with the number for yourself.

While no single tool may capture the perfect pie split, they do provide an estimate that will help to shed light on the relative value of what each of your startup founders brings to the table. I’ve barely scratched the surface here so do your research, use some, none or all of the tools available and then have an open and  frank conversation with your co-founders.

Finally one last piece of advice that I recently received and thought was worth sharing – if you and your co-founders find yourselves fighting over 1 or 2% worth of equity then it might pay to stop and ask yourselves, are these really the types of people you want to be tying yourself to for the next few years of your life?