By Carlos Desdema, Audra Bowcutt, Avi Yaar, Tom Rose

The equity split in a startup company is often one of the earliest decisions made by a founding team, and is frequently one of the most difficult. There has been a wealth of advice given to entrepreneurs about how to split equity, when to do it, and how to go about doing it. Behind all this advice is the specter of absentee founders, lawsuits, and disappointments.

As part of an effort to shed some light on actual equity splits taking place in start-ups, a team of MIT students  (Jeff Vyduna, Manuel Duenas, Alexander Angerer) surveyed the 150+ companies that had been through the Y Combinator startup accelerator program.[1] A summary of their results can be found here: http://bit.ly/mKu5Xr. Our team sought to replicate and improve upon the results in the Y Combinator survey by running a survey against the companies in a similar startup accelerator program known as TechStars.

Background on TechStars
TechStars is a startup accelerator with programs in Boulder, Boston, NYC and Seattle. Each program accepts approximately 10 startup companies from a wealth of applicants (TechStars Boston’s 2011 program had over 600 applicants), and gives each company $6,000 per founder (up to $18k for 3 founders), office space for three months, proactive mentoring from local and national entrepreneurs, specialists, angels and VCs, and a defined curriculum designed to help founders address the biggest issues that their startups are facing (acquiring customers, pitching your startup, building financials, marketing, differences between angel and VC money, etc.). In return, TechStars takes 6% equity (in common-stock) from the startups that they accept into the program.

1. How do you define “founder”?
Timing and sacrifice were the most common reasons to designate someone a founder. The majority of respondents (20/28) mentioned that being part of the organization early in its history.  For example, some described founders as people “there at the start of the company” or teammates that were “there from the beginning of actual work.” In addition to timing, personal sacrifice was another popular theme and was mentioned in 29% of responses (8/28). As one respondent put it, a founder is someone “willing to die for the company.”

Less popular reasons to designate someone a founder included contributing the company’s original idea (3/28), being an essential or vital contributor (2/28), or being a major shareholder (1/28).

In sum, the majority of respondents held the traditional view of “founder” meaning someone that contributed at the organization’s inception.  

 

 

2. How many founders held or hold equity?
The majority of TechStars participant companies have three founders. The next most common number of founders is two. All other numbers of founders were very rare. One company consisted of a single founder, and two companies had four founders. None had five or more founders.

TechStars does not encourage single person ventures, so that policy explains the lack of single person founding teams. The TechStars program itself has pre-selected for a team size greater than one. Interestingly teams of three were more prevalent than teams of two, although this may be incentivized by TechStars’ $6K per founder for up to three founders rule.

The general trend at Tech Stars matches that of Y-Combinator, but the split between two- and three-person founding teams is different.  Specifically, at TechStars, 54% of founding teams were three-founder teams, where at Y-Combinator only 33% of teams had three founders. This may be due to the differences in monetary reward structuring between Y Combinator (which awards $11K base to all accepted companies, plus $3K per founder) and TechStars (which awards $6K per founder with no base award). 

3. Did you split your founder equity equally among the original co-founders?
Similar to the Y Combinator results, there continues to be a clear trend that the fewer founders engaged in the venture, the more likely an equal split.  For example, two-thirds of the two-founder ventures reported splitting the equity equally, while the majority of ventures with three or more founders reported not splitting the equity equally. Also continuing to emulate the Y Combinator results, there are an approximately equal number of respondents who have split equity equally compared to those who have not. 

 

 

 

4. Which factors did you use to determine what share of equity to give each cofounder?
Responses to this question were considered along the lines of the responses to question four. The graph below shows that teams that did not use equal splits made their equity split determinations mostly because of past actions. The date someone joined the team was the most popular of these reasons. Others included the original idea and the work completed prior to the equity split. What these teams seemed to value less often were teammates abilities to impact the organization’s future such as experience, capital contributions, or skills.

The Y-Combinator study yielded similar results. That study’s authors analyzed open ended answers to the question that asked what factors founders used to make a non-equal equity  determinations. We took those tallies and divided them by the total number of determinants noted by the respondents. As with the TechStars respondents, timing and past contributions to the team were popular determinants of non-equal equity splits. Attributes that could contribute to the organization’s future, such as skills, capital, and experience, were seen as far less important.

The only other item that appeared worth noting was that the TechStars respondents that used non-equal equity splits were more likley to consider the creation of the original company idea to be important than did similar Y-Combinator respondents.

 

5. Did your founding team agree to a vesting schedule?
All but two (of 29) teams indicated that they had agreed to a vesting schedule. Several respondents provided some more detail reporting four year (4) and three year (2) vesting schedules. Interestingly, one of the two respondents that indicated his/her team did not agree to a vesting schedule identified that issue as something he/she would have changed in hindsight.

 

 

[1] Part of a class called Designing and Leading the Entrepreneurial Organization at MIT Sloan School of Management taught by Professor Matt Marx

 

 

Acknowledgements

The team would like to thank David Cohen (CEO and Founder of TechStars) for his generosity in posting our survey to the alumni Facebook page; as well as all the TechStars companies that participated in the survey. In addition, we’d like to thank Jeff Vyduna, Manuel Duenas, and Alexander Angerer, for offering us access to their paper on the Y Combinator results. Finally, we’d like to thank Prof. Matt Marx and Miro Kazakoff (TA) for providing us with useful cases and insight into the entrepreneurial dilemmas and giving us the framework through which we analyzed and reported on our results.