Clever Geek Handbook

Y Combinator: How to Distribute Stakes Among Startup Founders (Michael Sibel)

On November 9, 2020, the Startup School for Future Founders by Y Combinator was launched and we will publish useful translations for those who plan to become a founder of an international startup. Follow the news on the YC library telegram channel in Russian .



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Michael Sibel is a co-founder of startups Justin.tv/Twitch and Socialcam, and a board member of Reddit. Currently the CEO of Y Combinator.



How many shares should your co-founder give? This is both a problem and a question that many have written about. On the Internet, you will find a variety of tips, but, in my opinion, when distributing shares in a startup, founders overlook several important points.



Some of the most frequently cited reasons for unequal shareholding in a startup are:



  • I came up with an idea
  • I started working N months before my co-founder
  • We agreed so
  • My co-founder got paid for N months, but I didn't
  • I started working full time N months before my co-founder
  • I'm older / more experienced than my co-founder
  • I recruited my co-founder after raising N thousand dollars
  • I hired my co-founder after launching my MVP
  • We need someone to tie-break in case of a founder dispute




Founders tend to make the mistake of dividing shares based on prior work.



All of this reasoning leads to four fundamental mistakes:



  • 7 10 , . 2-10 .
  • = . . , . () , .
  • , . , . 10% 1%, , , . , . , , ?
  • — , . , , , .




The shares should be divided equally because all the work is ahead.







To begin with, by dividing the shares among the co-founders, you thereby motivated them to support your company for the years that you need to build a large and influential business. Often, the co-founders with whom you are negotiating do not quite understand how much time they should devote to a startup, especially if it already works. As the CEO responsible for allocating shares, you will have to think about the long-term interests of your co-founders, even if they themselves are not currently thinking in the long term.



One of the biggest misconceptions that I hear from founders is something like this: “we have such a distribution of shares because we agreed so from the beginning”. As a virtuoso CEO, the first thing you should think about is not how to negotiate a stake with your partners, but how you can organize your stake allocation in a way that motivates your teammates as much as possible.



Your concern about the distribution of shares is well founded. Many start-up teams fall apart and many founders go out of business. But your main defense mechanisms are vesting and cliff.



If you transfer a share of the company to someone, including a co-founder, you have what is called a four-year vesting. That is, before receiving a block of shares, a person must work in the company for four years. Typically, you can also take advantage of the "cliff", which means that if a person leaves or is fired from the company within the first year, they will receive nothing.



This way, as a CEO, you try to motivate your team as much as possible and at the same time prepare yourself insurance. Even if you are wrong in choosing a co-founder, you will have a chance to save the company from negative consequences if you manage to adjust the work during the first year.



On the other hand, since you have risk hedging, you even benefit from being generous and giving the co-founders a bigger chunk. By doing this, you motivate them to stick with your startup even when things don't go the way they would like. Therefore, as a CEO, you should think about how to prevent a situation in which your partners lose interest in the business and you have to encourage them to work. It is much better to create conditions so that their stake in the company becomes what encourages them to wake up in the middle of the night, encourages them to work on weekends, encourages them to work late, encourages them to bring their friends, and in general allows them to feel like real owners of the company, and not just employees.



I argue that the shares of all co-founders should be equal, this is a simple rule, but it is not always possible to follow it. I always tell founders when allocating shares - remember the long-term motivation of your cofounders. If you're not concerned about the long-term motivation of your co-founders (or even the need for co-founders later), then why did you even take them as a co-founder?



(We are preparing a complete translation of all Startup School and YC Library training materials, follow the news here )



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