How to Avoid Co-Founder Conflict by Being Transparent About Equity

Start with culture: The first part of a series on building a strong culture for your early stage startup.

We don’t talk about startup culture enough. We know how to estimate TAM, drive towards product-market fit, sell to our customers, and pitch to investors. But do we know what it takes to build a great early team that sticks together in what is arguably going to be one of the toughest endeavors they’ll ever undertake?

I’ve learnt these lessons the hard way not once, but several times. At the core of building a great team you can be in the trenches with is trust. And you can’t have trust without transparency. What do I mean by transparency?

In this blog post, I’ll share with you why transparency is crucial for avoiding co-founder conflict, especially when it comes to equity. I’ll also give you some practical tips and tools to create and manage equity agreements that are fair and clear for everyone involved.

Why Transparency Matters for Co-Founders

Let’s start with a tricky one: compensation. Always get something in writing; verbal agreements just do not work. It’s tempting to want to dive in and start working based on a verbal agreement. We all want to trust and believe that what we’re working on is bigger than all of us. And while that is true, it’s also important to look after yourself. You’re not going to do your best work 2, 3 years down the line if you’re always wondering where you stand with your company.

Don’t start working until you get these agreements drawn up and signed. Email agreements don’t work either - you need something a lawyer can work with, should it come to that. While we’re all starting companies for meaningful reasons or because we’re in love with an idea or problem, make sure to take care of you and the rest of your team.

After all, the biggest reason early stage companies fail is co-founder conflict. Nip it in the bud right away. Don’t let equity be used as a carrot or stick to reward or punish yourself or your team members in the future. Lock it up, forget about it, and focus on building the best business ever.

How to Be Transparent About Equity

So how do you create and manage equity agreements that are transparent and fair? Here are some tips:

Use a vesting schedule. This is a common practice among startups, and for a good reason. A vesting schedule means that you and your co-founders don’t get your equity all at once, but rather earn it over time as you work on the company. This way, you can avoid situations where someone quits early but still owns a big piece of the pie. The usual vesting schedule is four years, with a one-year cliff. That means you don’t get any equity until you’ve worked for one year, and then you get 25% of your total equity. After that, you get the rest over the next three years, usually every month or quarter.

Use a dynamic equity split. This is more controversial and not recommended for all situations. This divides equity among co-founders based on their actual contributions rather than a fixed percentage, in theory creating more flexible and fair ownership. A dynamic equity split uses a formula that assigns a value to each co-founder’s contribution, such as time, money, ideas, or connections. The formula then calculates each co-founder’s share of equity based on their relative value. This way, you can account for changes in roles, responsibilities, and commitments over time. One tool that I’ve used and liked for implementing a dynamic equity split is Slicing Pie.

Use an online platform. This is a more convenient and transparent way of creating and managing equity agreements online, rather than using paper documents or spreadsheets. An online platform lets you create customized equity agreements, track vesting schedules, monitor cap tables, and share information with your co-founders and investors. Some of the more popular online platforms include Carta, Capshare, and Eqvista.

Conclusion

Being transparent about equity is one of the best things you can do for your company. By being transparent, you can build trust and reduce unnecessary conflict among your team.

I hope this blog post has been helpful for you. If you have any questions or feedback, please leave them in the comments below. And if you enjoyed this post, please share it with your friends and colleagues who might find it useful.