I don't have enough equity in my startup. Is it too late to change the split?

No. It's never too late. This is the story of the first time we changed our equity split. Yup, you read that right. The first time...

We split equity for the first time

When I first joined my co-founder as second in command, he had an idea, a few hundred thousand dollars raised, an old friend seed fund GP who had promised a term sheet, and no idea how to build the product he envisioned.

Enter me. CPO extraordinaire. I know how to do it! I've done it before! I can do it in my sleep. So convincing was I that I went from product-consultant-content-to-run-my-own-firm to an accidental co-founder.

I am not, however, a CTO.

So, the plan was that I'd get 25% of the equity and my co-founder CEO would keep 75%, "holding on to the yet to be CTO's share".

This was beyond stupid on my part.

This wasn't in an equity pool, it was just founder stock, pre-equity pool setup. There is no holding equity for someone else in this circumstance, there's only, welp, if we don't hire, he'll keep it.

So, what happened?

The next few months do not work out as planned

Over the next few months:

• We didn't hire a CTO - I managed a dev shop.
• We got a term sheet on a $4M seed round.
• The GP "friend" who was the lead told us to find an industry specialist fund to co-invest.
• The GP "friend" ignored all the calls from the funds who liked us, per their report. On his side, it was just "difficult" and "political" at his fund.
• Months and months elapsed.
• We finally located our spines and walked away from the deal, more than 6 months later.
• We decided to raise a much smaller pre-seed round to get to market.

And I had 25% equity and was managing the whole of the product build - design, product, regulatory (significant in our space), engineering. My co-founder was fundraising (see broken round), recruiting a few fractional contractors and advisors, and doing some marketing exploration.

Rounds fall apart all the darn time. Nobody talks about it, but it's true. What's brutal as the non CEO cofounder, though, is watching that lack of success while working 24-7 to build for a whole heck of a lot less upside.

2/3 less in my case.

We renegotiate

I let my frustration build and build until I could scarcely look at him (note: do not wait this long - this was a bad choice on my part). And then I sat him down and told him I needed a more fair split. He asked me what I wanted, and I said 40-60.

So we did that. Because my cofounder is not an asshat - he's actually a totally decent guy, doing the CEO thing for the first time.

So we called our lawyer, who told us this happens all the time. (Another thing nobody talks about.)

Because the fair market value hadn't changed much, the tax due on him transferring shares to me was minimal. That's one reason why it's important to adjust splits as early as possible if you can. The value (and therefore any taxes due) is low, there are no/fewer investors involved, there may be no board other than your cofounder, or you and your cofounder.

To Don'ts: Initial equity split as the non CEO cofounder

Save yourself the heartache. Don't do these things, which are stupid:

• Accept an equity grant that's less than about half if you have one cofounder, about one third if you have two cofounders. Don't cofound with more than two cofounders. Just don't
• Let the CEO "hold on to" equity for an as-yet mythical additional cofounder. You split the equity fairly between you two as though there will never be a cofounder, and if you take one on, you both get diluted proportionally.
• Bottle it up the anger and rage and sense that the whole world is unfair. I get it, you're afraid the conversation won't go well. But unless you're content feeling like you're being used for the rest of your startup journey, there actually is no worse outcome. Rip the bandaid off. Now.

The only exceptions are things that rarely happen - the CEO is rich and is putting $10M into the business. There are already paying clients and they are scaling fast (but then are you really a cofounder?). You are a big name in your field and are playing a very part-time advisory role with a cofounder title. There are probably more. I can only think of one situation where I thought a very unequal equity split was fair.

And of course, all the usual advice. Put it in writing. File an 83b in a timely manner if appropriate. Get a lawyer to draft your documents (or use something like Cooley Go if you must). Vesting with a cliff for you both.

I'm not your lawyer, your therapist, your advisor, or your accountant. We're just internet friends, and these are just my experiences and personal opinions. Consult professionals for advice before you make any sudden moves in your startup.

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