Co-Founder Equity Splits: Why 50/50 Isn’t Always ‘Fair’

When Bill Gates and Paul Allen co-founded Microsoft, they agreed on a 64%-36% equity split, reflecting the differences in their early contributions to the company. Meanwhile, Google’s co-founders Larry Page and Sergey Brin seemed to have had an even split, emphasising their partnership as equals. So which approach is better for your start-up? The answer isn’t as straightforward as it might seem.

Dividing equity among co-founders is one of the most important and complex decisions a founding team will face. At first glance, splitting everything equally may appear to be the fairest, most logical choice—one that avoids potential conflicts down the road. However, research and the experiences of successful startups suggest that equal splits often do more harm than good. 

The Benefits of Unequal Equity Splits

In reality, unequal equity arrangements tend to foster stronger partnerships, align expectations, and lead to long-term success. Here’s how:

Fewer Disputes

At first glance, dividing equity equally among co-founders may seem like the simplest and fairest option. However, this approach frequently skips crucial conversations about roles, responsibilities, and contributions—conversations that are essential for avoiding misunderstandings and disputes down the road.

When equity is divided equally, co-founders might assume that their future contributions will be valued equally, but this assumption is rarely discussed. For example:

• A technical co-founder building the product may expect a larger stake for their intensive efforts, but this isn’t addressed in an equal split.
• Another co-founder might anticipate their networking and fundraising efforts will play a significant role in the company’s success, yet this contribution often goes undefined.

Without explicitly discussing these contributions, equal splits create an illusion of fairness while leaving important expectations unresolved. Over time, this lack of clarity can lead to unmet expectations, feelings of being undervalued, and eventually, disputes.

By contrast, unequal equity splits encourage co-founders to engage in thoughtful, in-depth discussions about each person’s contributions, risks, and responsibilities early in the process. As Noam Wasserman, author of The Founder’s Dilemmas, explains, teams that have these conversations upfront—particularly when opting for unequal splits—are far less likely to encounter disputes and more likely to maintain long-term satisfaction.

Recognition of Contributions

To ensure a fair and lasting equity split, it’s essential to account for the unique contributions of each co-founder. Equal splits often fail to reflect critical factors such as the time, expertise, and resources each person brings to the table.

For instance:

• A technical co-founder responsible for building the product from scratch is likely contributing significantly more effort than someone handling less time-intensive tasks.
• Similarly, a co-founder taking on a demanding full-time leadership role provides more value than one contributing on a part-time basis.

Failing to recognise these differences can lead to long-term dissatisfaction. Research by Wasserman and Hellman (2016) shows that founders are 2.5 times more likely to feel unhappy with their equity split when contributions and evolving roles are not adequately considered. This dissatisfaction frequently leads to conflict and disruptive renegotiations.

By embracing unequal splits, founders can foster clarity and alignment, rewarding those who make greater contributions and setting a strong foundation for trust and collaboration as the company grows. 

Investors Feel More Confident

Equity splits don’t just affect internal dynamics—they also send a powerful message to potential investors. Companies with equal equity splits may struggle to secure external funding, as investors often see equal splits as a red flag. Why? 

Equal divisions can suggest that founders avoided having difficult but critical conversations about their contributions, responsibilities, and long-term roles. This lack of clarity can raise concerns about potential leadership issues or misaligned priorities within the team.

On the other hand, unequal splits demonstrate a higher level of maturity and strategic thinking. They signal to investors that the founding team has carefully evaluated each member’s unique contributions and is prepared to address challenges collaboratively. This thoughtful approach builds confidence, showcasing a team that values fairness and accountability—qualities that investors look for when deciding where to place their bets.

When to Decide on Equity Splits

Besides determining how much equity your founding team should have, when is also an important factor to consider. Timing plays a big role in equity distribution. Rushing into a decision before co-founders fully understand each other’s roles and contributions can lead to serious imbalances and future disagreements. If possible, delay the decision until the team has worked together and responsibilities become clearer. This is especially important for startups that are pre-revenue or planning to allocate equity to future employees or investors. Waiting ensures each founder’s input is properly assessed, leading to a more informed and fair split.

The Exception: Experienced Teams

For co-founders with a history of working together, an upfront equity decision may feel more straightforward, as their past collaboration provides a clearer foundation. Even so, these teams should remain open to revisiting and refining equity arrangements as the company grows and roles shift. A flexible approach ensures long-term alignment and reduces the risk of future disputes.

The Founder’s Pie: A Frameworks for Equity Allocation

Deciding how to split equity among founders can be one of the most challenging and consequential decisions for a startup. It requires balancing fairness, contributions, future potential, and personal dynamics. Below, we delve into one of the most insightful tools: the Founder’s Pie.

What Is the Founder’s Pie?

The Founder’s Pie, developed by Frank Demmler, offers a structured and transparent way to allocate equity based on contributions. It helps founders weigh various factors such as:

• Idea: The idea is the foundation of the company’s existence, but success depends far more on execution. Who came up with the original idea for the business?
• Business plan preparation: Developing the initial business plan is a demanding and essential task that organises the team’s vision and secures buy-in from stakeholders. Who invested the time and effort to create the plan that set the foundation for the company?
• Domain expertise: Industry knowledge and networks can accelerate success, open doors, and reduce costly learning curves. Who brings valuable experience or connections in the company’s field?
• Commitment and risk: Full-time dedication and personal sacrifices often weigh more than part-time involvement, and those taking on risks lay the groundwork for success. Who is dedicating the most time and resources, and who is assuming significant personal or financial risks?
• Responsibilities: Clear accountability for critical tasks ensures effective execution and leadership when it matters most. What roles will each founder take on, and who is responsible for critical decisions and leadership?

The Founder’s Pie emphasises that equity should reflect measurable contributions rather than arbitrary or equal splits. By assigning scores to these factors, it becomes easier to arrive at an equitable distribution that aligns with each founder’s input and commitment.

How Contributions Are Calculated

To fairly divide equity using the Founder’s Pie method, each founder’s contributions are evaluated based on the key elements listed above. 

Step 1: Assess Contributions

For each element, ask questions like:

• Who contributed to the idea?
• Who developed the business plan?
• Who has industry knowledge or connections?
• Who is fully committed to the company, and who is taking risks?
• Who will be responsible for key roles, like fundraising or product launch?

Assign each founder a score for every element on a scale of 0 to 10, based on how much they contributed.

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Step 2: Weight the Elements by Importance

Not all elements carry the same weight in every startup. For example:

• In a technology-focused company, domain expertise might be more important than business plan preparation.
• In a marketing-driven startup, responsibilities like sales or outreach might hold more weight.

Assign a weight to each element (e.g., on a scale of 1 to 10) based on how crucial it is to the business’s success.

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Step 3: Calculate Weighted Scores

For each founder, multiply their score for each element by the weight assigned to that element. This gives a weighted score for every contribution.

For example:

• If domain expertise is weighted at 5, and founder 1 scores 10 in domain expertise, their weighted score for that element would be 5 × 10 = 50.

Step 4: Add Up Each Founder’s Total Score

Add up the weighted scores for each founder across all elements.

For example:

• Founder 1: 0 (Idea) + 8 (business plan) + ... = Total Score: 82.

Step 5: Determine Relative Percentages

Add the total scores of all founders to get a grand total, then calculate each founder’s percentage contribution. This gives each founder their percentage share of equity.

Founder 1's Percentage = (Total Score of Founder 1 / Grand Total of All Founder's Scores) x 100

In our example:

• Grand total of all founders’ scores = 421
• Founder 1’s total score = 82

Founder 1's Percentage = (82/421) x 100 = 19.5% of the company’s equity.

Bring Vesting Agreements Into the Conversation

After deciding how to split equity, a vesting agreement should be a non-negotiable part of the equation. Vesting agreements ensure that founders and key stakeholders earn their equity gradually over time rather than receiving it all upfront, creating a structure that protects the company and incentivises long-term commitment.

Why Vesting Agreements Matter

Without a vesting agreement, there’s a risk that a founder could leave early while retaining a disproportionate equity share. This can destabilise the company and discourage future investors who value clarity and fairness in ownership. Vesting agreements help mitigate this by distributing equity over a standard period, typically 3–5 years, ensuring equity reflects ongoing contributions to the company’s success.

The Importance of a Cliff Period

Most vesting agreements include a one-year cliff, a critical safeguard for early-stage startups. During this period, founders earn no equity. Once the cliff ends, equity begins to vest incrementally, typically on a monthly or quarterly basis.

Here’s an example of how a five-year, time-based vesting schedule might work:

• Year 1: A founder earns nothing until the one-year cliff is reached.
• End of Year 1: They receive 10% of their total equity allocation (e.g., one-fifth of a 50% share).
• Subsequent Years: Equity vests monthly, adding incremental ownership—approximately 2.5% per quarter for the remaining four years.

If a founder leaves after two years, they retain only 20% of their total allocation, ensuring the equity they keep aligns with their contributions while protecting the company from losing a disproportionate stake.

Time-Based vs. Milestone-Based Vesting

Two primary types of vesting agreements exist, each with unique benefits:

Time-Based Vesting

• The most common approach, it distributes equity gradually over a set period, such as 3–5 years.
• This method is simple, predictable, and flexible, making it ideal for the fast-changing environment of startups.

Milestone-Based Vesting

• Equity is tied to achieving specific business objectives, such as hitting revenue targets, launching a product, or securing funding.
• While this approach directly links equity to outcomes, it can be difficult to define and adapt as startup goals evolve. For early-stage startups, the uncertainty surrounding milestones often makes this less practical than time-based vesting.

That's a Wrap

Equity splits are more than just numbers—they define your team’s commitment and alignment. By using tools like the Founder’s Pie and Wasserman’s scoring method, and incorporating vesting agreements, you can create a fair, transparent structure that reflects each founder’s contributions and future potential.

A thoughtful equity split fosters trust, motivates your team, and builds confidence with investors. With clarity and collaboration, you can set the stage for long-term success.

Like what you've read and are ready to supercharge your startup journey? Explore our Founder Resources—the ultimate toolkit for founders, featuring expert-crafted templates, guides, and strategies to help you build, launch, and grow with confidence.

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