Chapters (Powered by ChapterMe) - 00:00 - How much equity to give your cofounders 00:23 - Equity splits should maximize motivation 01:32 - Safety mechanism for equity - Vesting and Cliff 02:21 - More generous with equity not less 03:21 - Equal equity splits 03:57 - End
What impresses me the most is your ability to break down complex knowledge and experience, into such simple explanations. Thank you, I didn't know about vesting and cliff.
its the brilliancy that arises from truly aiming at truth seeking and maximal effectiveness/efficiency. You'll often come across people whos primary goal is to ~impress which often leads them down a road of unnecessary complexity.
I was hesitant giving up a lot of equity to my 2 confounders until I learned about vesting and a cliff. Now we’re equal 33.3% partners. Thanks Michael!
TWO POINTS: (1) Equity split that MOTIVATES all the members of the team. (2) 4-year vesting (equity only matures after 4 years) with a 1-year cliff(lose all the equity if fired/leave within one year).
Michael’s demeanor and method of delivery just takes the edge off and helps you forget of the day to day required to run a startup. Thank you for all your videos!
Some people are so funny. I had i situation when i as a tech founder was working for 1 year, invested own 50k$, and created a first working version of a product. Then i found a cofounder to strengthen the team, who was familiar with the industry and good as sales (from his words) and he wanted 50/50 split. Just like this. And he was telling the same words like Michael here, like "This is for a long run, we will work for years!". Aha. So lets do the following: you invest a lot of your own savings, work for a year without salary, create a working version to prove of concept and then i will join 50/50 for a long run! But no one wants this. Everyone want to share the profit, but nobody wants to share the risks.
I think it's also important to think about what you would like the co-founder(s) to bring, and based on that as well determine the split. And i would say it's easier to go alone that to go with a wrong co-founder.
Motivation, foresight an eye for dilution and understanding of your company's near-term growth are essential to cutting up the pie. The equity split between you and your co-founders will depend on your understanding of above-mentioned elements.
Gave out 50% to a friend..... He exited the company after we couldn't secure funding in three months Left the country too... Now had to pay legal fees to officially retrieve 50% of my company I advise you give equity based on contribution
this is why there are other videos on YC that also tell u to pick a proper co-founder, the point is if the co-founder cannot be worth 50 percent, it is not your co-founder, remember, solo founder is always better than having a bad co-founder
This is such a great answer. In harsh reality though, most people are movtivated by money at present. Do you think promising equity is a good way to reduce payroll at a startup?
Thanks for the clear explanation. What do you do if you are a solo founder who wants to take someone aboard after several years to have someone else with skin in the game? How much equity would you give and how would you go about it? Of course it can't be given away just like that for free.
@@servercrux8070 The same here. I had a co-founder who left because he is not made to be founders (this is not easy). Should I give to the new one the same I gave? I already had first investment...
Very clear advice to the CEOs. I have another situation where CEO is leading the company terribly and making bad decisions. They haven't gotten any investments but the co-founders want to fire CEO. How should it take place?
What an unenviable situation to be in!!! If you have professional outside investors, they would have taken care of this problem but in the absence of such comfort, it depends on your equity positions, your Co-Founder Agreements and the local applicable law. In any case it will be an extremely unpleasant exercise. I would advise you to pursue convincing your CEO to come around or else quit if you haven't spent too much time and effort on it already.
How does vesting work if a cofounder leaves after one year but before 4 years? Do they just get pro rata? So for example if they were promised 40% and they leave after 2 years, they get just 20%?
I mostly disagree. Should the cofounders be vested? Yes it will help movitate the cofounders to stick around to build the product/service, but this route will only lead to cofounders to know that their efforts are worth it until after the vested period. Not good for the cofounders. Plus, since the founder have the most say and the most control, he/she can choose to sell the product/service within the vested time which he/she had just screwed up the cofounders for their efforts, therefore, the risks are too high for the cofounders. Best solution: agree on the equity splits from the beginning with all cofounders base on their initiation efforts and then the equity should only progress from there on dynamically.
Hello, thanks for the video! I would like to ask about time commitment. Equity is a very important thing, but once you’ve come with a split where everybody is happy, how much commitment in terms of hours should the CEO and the cofounders have? The question is quite straightforward, all your time if you really want to build a company. Nevertheless, what happens if after the split the CEO ends up doing half of the hours that the cofounders are doing? I believe that as a CEO you have to think in the long term with the equity and also with the time commitment. Could someone call himself CEO of a company if the time commitment he/she has is the company is less than the time commitment the cofounders have?
How about paying a freelancer that has the potential to become future CTO, paying with money and equity. If a project costs around 40-50k, would some freelancers agree to accept 50% of the cost, plus equity?
I did meet a freelancer who was open to that idea, so yes its very possible, but not easy to come by. But on a side note, if you're able to pay 50%, just stick with paying off the project. Keep engaging freelancers till some revenue starts coming in, this way you don't dole out equity too early on or you then find a better fit for certain roles.
I think if you pay people, either today or in 10 years, that is a better model than equity. No one will see your vision like you do especially if all they have is x percent of who knows what. So if you need something done whether it is for a client or for the business. Have a budget, negotiate a price, give your guy hard cold cash. Do this and repeat then you'll never fight with anyone.
Having the 1 year cliff, if you are able to fire the co-founder within a year that would be a big risk to take for them. The possibility existing to work for one year for nothing. Not sure how to solve this.
Cliff really only works if you are also getting paid a minimal salary. Otherwise you could be working for free for a year if the company lets you go just before. The probability of attracting an experienced professional to become a co-founder under such terms would most likely be minimal.
Great video. Maybe think Elon Musk's tesla stock option vesting may be an alternative. The more the company is worth the more the cofounder stake is worth?
That's how it always works. The higher the company valuation, the higher the value of the shares. E.g. if you own 10% and the company is worth $10m then your stake is $1m. If the company's value rises to $20m then your 10% is $2m.
What if I don't need co-founders at all? What if it's a one person company from idea to design to development to manufacturing to selling? What's the downside to that?
Depending on the complexity and the type of business you're trying to build. E.g.) Having an ice cream business is different from running a SaaS startup. Downside is there is a good chance you'll get burned out. Elon Musk started PayPal with his brother, not by himself. If you're confident you can do everything by yourself, get your product out asap and start selling. You top and bottom line will be your indicators.
@@tenniswithric I will definitely need some help in the process and I can always outsource services for as long as I need them. But having a non-functional founder just for the sake of having one doesn't sound wise in my case.
If there was 4 year Vesting and 1 Year Cliff & Co-founder leaves the company in 13 months... then what? He still receives the Equity after 4 years? Seems bit wrong!
Some investors want to see co-founders. Initially I was going to have 2 with me, but I ended up finishing the project myself. Plan now is to outsource most tasks to freelancers or part time employees, then later hire from that pool when it's time to scale up as revenue comes in. Instead of co-founders, I'll set up a management team.
@@V12theGod A person should stay because he’s happy, both sides have to be sincere with themselves though. Most places provide 25% for each of the vested years, so even if one has to walk away the second year he could be entitled to 25% + additional months equity. It really comes down to the cliff period. Yes, there’re people staying just to be fully vested even though they hate the place, same as people working those extra years in a job they hate to be eligible for a pension. Giving equity and finding right fit is a risk.
Chapters (Powered by ChapterMe) -
00:00 - How much equity to give your cofounders
00:23 - Equity splits should maximize motivation
01:32 - Safety mechanism for equity - Vesting and Cliff
02:21 - More generous with equity not less
03:21 - Equal equity splits
03:57 - End
What impresses me the most is your ability to break down complex knowledge and experience, into such simple explanations. Thank you, I didn't know about vesting and cliff.
its the brilliancy that arises from truly aiming at truth seeking and maximal effectiveness/efficiency. You'll often come across people whos primary goal is to ~impress which often leads them down a road of unnecessary complexity.
@Joseph Myles woah, it worked, now my credit card info has been stolen and same for my Instagram account, thx for scamming me
I was hesitant giving up a lot of equity to my 2 confounders until I learned about vesting and a cliff. Now we’re equal 33.3% partners. Thanks Michael!
Who put the most money
That means that in theory 2 of you can boot one out, right? How would that work and how can you prevent this happening to you?
Are you all technical cofounders? How did you manage to hash that value out?
@@yrac2409 1 marketing expert, 2 coding experts. 33% each.
yc also says - need a majority owner
TWO POINTS:
(1) Equity split that MOTIVATES all the members of the team.
(2) 4-year vesting (equity only matures after 4 years) with a 1-year cliff(lose all the equity if fired/leave within one year).
Michael’s demeanor and method of delivery just takes the edge off and helps you forget of the day to day required to run a startup.
Thank you for all your videos!
I love this guy, he is such a blessing to us. Straight to the point no time to beat about the bush.
This is beautiful. My co-founders and I are just now going over our co-founders agreement rough draft. This was very helpful 😊.
I’m a new founder, working on my first start-up. Please update me on how it went with as much detail as possible! 😂🙏🏻
Some people are so funny. I had i situation when i as a tech founder was working for 1 year, invested own 50k$, and created a first working version of a product. Then i found a cofounder to strengthen the team, who was familiar with the industry and good as sales (from his words) and he wanted 50/50 split. Just like this. And he was telling the same words like Michael here, like "This is for a long run, we will work for years!". Aha. So lets do the following: you invest a lot of your own savings, work for a year without salary, create a working version to prove of concept and then i will join 50/50 for a long run!
But no one wants this. Everyone want to share the profit, but nobody wants to share the risks.
I love how articulate Michael is
Lol- just as I was exchanging on this with an engineer 30 mins ago, I get this on my feed. Happy to let #Google see my data. Thanks #MichaelSeibel
This is great. As someone who's read your blog posts (and gotten tremendous value from them), the videos are even more impactful. Thanks.
What is his blog ? I mean the blog name
So simple. So valuable. Thank you.
A much better answer than other youtube channels. Great!
other channel are stupid.. this are far better.. we need honest and neutral answer
This is really amazing! Straight to the point, simple, and succinct.
Love it!
Information (not data) is the new gold of the 21 century.
I think it's also important to think about what you would like the co-founder(s) to bring, and based on that as well determine the split. And i would say it's easier to go alone that to go with a wrong co-founder.
Amazing! Please post a video of creating a contract between founders - what to mention there about proving their activity in the company...
Motivation, foresight an eye for dilution and understanding of your company's near-term growth are essential to cutting up the pie. The equity split between you and your co-founders will depend on your understanding of above-mentioned elements.
I think the last part is the key. It answers all the questions.
Gave out 50% to a friend..... He exited the company after we couldn't secure funding in three months
Left the country too... Now had to pay legal fees to officially retrieve 50% of my company
I advise you give equity based on contribution
No cliff?
Why just to not incorporate a new company?
@@DennisIdeler I second this comment
Maybe have a mixture of both. Have a cliff but base the equity on contribution.
this is why there are other videos on YC that also tell u to pick a proper co-founder, the point is if the co-founder cannot be worth 50 percent, it is not your co-founder, remember, solo founder is always better than having a bad co-founder
This is such a great answer. In harsh reality though, most people are movtivated by money at present. Do you think promising equity is a good way to reduce payroll at a startup?
Seems you got no answer to this. Have you found out more about it meanwhile? Would be curious too.
This is gold. I definitely needed this
I found this channel to most useful for my start up
No thank you very much for your time! This is gold thank you as always
Thanks for the clear explanation. What do you do if you are a solo founder who wants to take someone aboard after several years to have someone else with skin in the game? How much equity would you give and how would you go about it? Of course it can't be given away just like that for free.
Did u get the answer? I m in the same situation and would like to know how to spilt equity.
@@servercrux8070 The same here. I had a co-founder who left because he is not made to be founders (this is not easy). Should I give to the new one the same I gave? I already had first investment...
Wow so helpful than hundreds of videos I have watched. Thank you
Excellent advice!
We are working in Argentina to implement your advices in how to make products and how to pitch ideas!
Thanks!!! We are grateful!!!
Michael said it, so I did it.
Put that on a T-shirt YC.
Video doesn't answer the question put in the title
awesome explanation 4 year vesting, 1 year cliff and long term motivation. The big picture.
Thank you! This made my mind alot clearer!
The big picture in a few words love it ⭐
So much valuable advice, thank you 🙏
Hgank you too Michael. Learning from your wealth of experience. Nice one YC
Very clear advice to the CEOs. I have another situation where CEO is leading the company terribly and making bad decisions. They haven't gotten any investments but the co-founders want to fire CEO. How should it take place?
What an unenviable situation to be in!!! If you have professional outside investors, they would have taken care of this problem but in the absence of such comfort, it depends on your equity positions, your Co-Founder Agreements and the local applicable law. In any case it will be an extremely unpleasant exercise. I would advise you to pursue convincing your CEO to come around or else quit if you haven't spent too much time and effort on it already.
@@newmanhyd999 How can someone avoid this initially?
I'd love to know what you think of dynamic vs. static equity splits (as per Wasserman or Moyer)?
How does vesting work if a cofounder leaves after one year but before 4 years? Do they just get pro rata? So for example if they were promised 40% and they leave after 2 years, they get just 20%?
Great, Couldn't find a pattern through traditional media. Thanks
I mostly disagree. Should the cofounders be vested? Yes it will help movitate the cofounders to stick around to build the product/service, but this route will only lead to cofounders to know that their efforts are worth it until after the vested period. Not good for the cofounders. Plus, since the founder have the most say and the most control, he/she can choose to sell the product/service within the vested time which he/she had just screwed up the cofounders for their efforts, therefore, the risks are too high for the cofounders.
Best solution: agree on the equity splits from the beginning with all cofounders base on their initiation efforts and then the equity should only progress from there on dynamically.
Lol maybe you shouldn’t work with people you don’t trust then
This was very informative. Thanks.
I just spent 4 months, searching for a cofounder. No luck!
Where were you looking though?
Zenahr I tried LinkedIn, Indiehackers, and cofounderlab
@@great567 There is also cofoundme and starthawk
Why 10% is minimal? What is the basis of such?
Hello, thanks for the video! I would like to ask about time commitment. Equity is a very important thing, but once you’ve come with a split where everybody is happy, how much commitment in terms of hours should the CEO and the cofounders have? The question is quite straightforward, all your time if you really want to build a company. Nevertheless, what happens if after the split the CEO ends up doing half of the hours that the cofounders are doing? I believe that as a CEO you have to think in the long term with the equity and also with the time commitment. Could someone call himself CEO of a company if the time commitment he/she has is the company is less than the time commitment the cofounders have?
This is gold.
if I find right one, very good percentate for sure. Might be more than what I have after several years, for example 5 years.
AMAMZING advice thank you
How about paying a freelancer that has the potential to become future CTO, paying with money and equity. If a project costs around 40-50k, would some freelancers agree to accept 50% of the cost, plus equity?
I did meet a freelancer who was open to that idea, so yes its very possible, but not easy to come by.
But on a side note, if you're able to pay 50%, just stick with paying off the project. Keep engaging freelancers till some revenue starts coming in, this way you don't dole out equity too early on or you then find a better fit for certain roles.
I think if you pay people, either today or in 10 years, that is a better model than equity. No one will see your vision like you do especially if all they have is x percent of who knows what. So if you need something done whether it is for a client or for the business. Have a budget, negotiate a price, give your guy hard cold cash. Do this and repeat then you'll never fight with anyone.
Before getting funding, most startups don't have cash to pay regular salaries or contractor work.
We thank you, not the other way around;)
Having the 1 year cliff, if you are able to fire the co-founder within a year that would be a big risk to take for them. The possibility existing to work for one year for nothing. Not sure how to solve this.
Cliff really only works if you are also getting paid a minimal salary. Otherwise you could be working for free for a year if the company lets you go just before. The probability of attracting an experienced professional to become a co-founder under such terms would most likely be minimal.
A vesting schedule is a lot easier to live with than a Buy/Sell Agreement!
Thanks so much
So how much equity should be granted? 10%, 20%, 30%?
If your founder how much you give equity your co founder plz explain
Great video. Maybe think Elon Musk's tesla stock option vesting may be an alternative. The more the company is worth the more the cofounder stake is worth?
That's how it always works. The higher the company valuation, the higher the value of the shares. E.g. if you own 10% and the company is worth $10m then your stake is $1m. If the company's value rises to $20m then your 10% is $2m.
Very helpful guidance Michael
I have some ideas and needed for a tech co-founder so could u please suggest me what should I do.
Very nice and truth
Thank you
need to warn against unethical practices such as firing just before 1st year cliff too
I mean people who do this will never really be successful cause at the end of the day your reputation matters, a lot.
GOLD
Awesome
thanks
I loved it
What if I don't need co-founders at all? What if it's a one person company from idea to design to development to manufacturing to selling? What's the downside to that?
Depending on the complexity and the type of business you're trying to build. E.g.) Having an ice cream business is different from running a SaaS startup. Downside is there is a good chance you'll get burned out. Elon Musk started PayPal with his brother, not by himself.
If you're confident you can do everything by yourself, get your product out asap and start selling. You top and bottom line will be your indicators.
@@tenniswithric I will definitely need some help in the process and I can always outsource services for as long as I need them. But having a non-functional founder just for the sake of having one doesn't sound wise in my case.
Thanks 🇿🇦
If there was 4 year Vesting and 1 Year Cliff & Co-founder leaves the company in 13 months... then what? He still receives the Equity after 4 years? Seems bit wrong!
It receives 25% of the total equity he would get after four years.
Guys, what if I do not have any co-founders, I mean, the idea is totally mine, what for do I need "co-founders"? Is just hire people not enough?
Some investors want to see co-founders. Initially I was going to have 2 with me, but I ended up finishing the project myself. Plan now is to outsource most tasks to freelancers or part time employees, then later hire from that pool when it's time to scale up as revenue comes in. Instead of co-founders, I'll set up a management team.
@@honorquest , exactly.
@@honorquest how's that coming along?
Vesting with a cliff is sound advice but it can lead to resentment as it is a form of manipulation.
Not really, the person may leave your startup for Google after a few months.. who knows.. It goes both ways really.
@@honorquest Does a person stay because they are happy or do they stay because they have to wait until theyre vested to leave?
Its sound advice but its a double edge sword. That's all
@@V12theGod A person should stay because he’s happy, both sides have to be sincere with themselves though. Most places provide 25% for each of the vested years, so even if one has to walk away the second year he could be entitled to 25% + additional months equity. It really comes down to the cliff period. Yes, there’re people staying just to be fully vested even though they hate the place, same as people working those extra years in a job they hate to be eligible for a pension. Giving equity and finding right fit is a risk.
Who hold the right the Fire CTO, COO . Can the CEO be fired
Long story short, make a vesting (4 years) an a cliff(1 year) [cliff = you leave before one year no equity].
exactly 5 years ago 🧍🏻♂️
Treasure
No Michael, thank YOU for your time. ;)
Looking for a co-founder? Try YC's new co-founder matching platform: www.ycombinator.com/cofounder-matching
And prescreen cofounders for malignant narcissism and psychopathy
Nice video, but give example with math :)
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4 years with 1y cliff is not an interesting offer at all for tech people