Co-founder dilution

When entrepreneurs talk about dilution to their share ownership, most of the time they’re talking about dilution from outside investors. Yet, more dilution, especially early on, can come from adding co-founders which is something no one seems to talk about.

I am in favour of having a co-founder. It gives you someone to bounce ideas off, energize you when you’re down, etc. Investors generally like them too. They know that if one of you goes postal, there is another one there.

But co-founders come in all shapes and sizes. You should never get one just because investors like it. And if you are considering having a co-founder take your time to ensure complete alignment in vision, goals (personal and company), approach, values, etc. Otherwise bad things can happen.

All too often, I will see a company with 2 founders. Only one of them has the CEO title. Only that person is responsible for fundraising, commercial results, etc. Yet, they both have the same equity stake. This is not fair.

It takes a long time build a truly valuable company. So, you need to be smart about how you allocate founder shares at the beginning. Don’t just split it 50/ 50 unless you each truly have equivalent responsibilities and impact on the business. And that impact assessment is not just now but over the life cycle of the business.

The best method for allocating founder shares looks at the long term value of each role. i.e. if one of you will lead the company, he or she should have more equity than someone who will be a developer or chief architect. It all comes down to what you are comfortable with. I have seen splits as wide as 90 / 10 between founders.

These conversations are never easy, but it’s best to have them early. Otherwise you begin your startup with an unfair equity allocation. There is no recovering from that.

Now, I know that at the very beginning of a startup there is usually no cash to pay someone. This is how you usually end up splitting the company. My suggestion is to involve a co-founder part time to justify a smaller stake until you have seed funding. Or, raise a small friends and family round so you can pay something to the person or people you need to get started.