Startup Equity Split

A breakdown of how startup equity should be distributed, with insights on common mistakes and best practices for allocating shares between founders, investors, and early employees.

Traditional Equity Distribution Structure

• Initial Founder Split

  • Two co-founders typically start 50/50
  • After investment dilution, founders end up ~35% each

• Investor Allocation

  • Investors typically take 25-30% of company
  • This comes from founder dilution during fundraising

• Employee Option Pool

  • Standard pool is 10-15% of company
  • Traditional distribution:
    • Key employees: 1-3%
    • Most employees: Below 1%

Recommended Improvements

• More Generous Employee Equity

  • Core team (employees 4-6) should get higher equity
  • Target 1-4% range for key early employees
  • All core team members should be above 1%

• Rationale for Higher Employee Equity

  • Early employees take similar risks as founders
  • They join when success isn't guaranteed
  • Current standard is "too founder greedy"

Where to Find the Extra Equity

• Can come from two sources:
  • Founder's portion
  • Investor's portion
• Requires better negotiation between all parties

Key Principle

• Early employees (4-6) take similar risks as founders and should be compensated accordingly
• More balanced equity distribution leads to better aligned incentives