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Chapter 4. Sharing Shares

The question of equity brings out the most fundamental differences, perceptions, and values in an aspiring startup. In fact, the equity question, more than any other, may strangle a young company before it can even get started. Of course, as discussed earlier, a quick death may be better than the long and drawn-out alternative.

But before we get to that...

Who’s a Founder?

It seems like an obvious question, and it’s one whose answer we have to agree on before we can talk about how much equity “founders” should get.

But as straightforward as the question sounds, in practice, it’s a tricky matter. The founder moniker is black and white, but reality is all shades of gray. Setting aside the philosophical question and focusing on the more useful economic one, though, there is a simple way of looking at it: founders are people who expose themselves to the highest risk in the company’s lifetime.

There are, quite roughly, three stages in every company’s life:

Stage 1: Founding

The only money the company has at this stage is what the team puts in. The team gets no money out of the company. The most probable outcome is that the company will fail: the team will lose all the money they put in, plus lost salary–plus they will also have to find jobs.

Stage 2: Startup

The company now has money, either from investors or from revenue, and the team gets some of that money every month (hooray for salaries!). The salaries are probably less than what the team members would ...