How To Determine Equity Percentage For Contributors & Co-Founders

Determining how much equity to give co-founders or contributors is not easy. On one hand, you want to fairly reward people for taking the risk, believing in you and helping you build your company from scratch. On another, you want to create the right incentives and only offer equity to those who are committed to your company’s success long-term.

Without access to initial funding, offering equity may seem like an easy way out. However, this is a mistake. The last thing you want is to end up with a crowded cap table full of people who really have no business being a part of your company and for your investors to start questioning you about every single person and requesting to buy him or her out.

As a rule of thumb, there are only four types of people to whom you should offer equity: strategic partners, investors, co-founders, and others who will be involved with your company long-term, for example, employees or advisors.

Here are two methods of determining how much equity you should offer.

If there are several co-founders and all of you plan to spend the same amount of time working on your new venture, then the equity should be split equally amongst you. We recommend that you have a vesting schedule so that equity is earned over a certain period of time, similar to a salary. You can negotiate for a small percentage to be vested upfront.

If somebody is not working on your venture full time, then you can approximate the amount of time they will be spending as a percentage of the overall amount of time spent, and use this as a guide to determine how much equity this person should be offered.

If you are at a later stage and have a company valuation, we recommend an alternative and more accurate method for determining the equity percentage. You and your contributor can agree on the number of hours a certain project will take as well as on the hourly rate. The rate may be adjusted upwards because it is paid in equity, rather than cash. Then the equity percentage you will offer to this contributor is going to simply be the number of hours times the equity-adjusted rate divided by the company valuation.

For example, if a contributor’s equity adjusted rate is $100/hour and his project will take 100 hours, he is effectively making an in-kind investment of $10,000. If your company valuation is $1,000,000, then he is going to get a 1% ($10K/$1M) equity vested over the time when he performs the work.

Victoria Yampolsky, CFA, is the President and Founder of The Startup Station, a comprehensive resource for modeling and valuing early-stage startups. She evaluates the financial feasibility of business models and specializes in the financial modeling and valuation of pre-revenue companies. She also created a finance curriculum for early-stage founders and launched The Startup Station’s educational program in 2015. Since then, more than 1,000 founders have attended her online and in-person finance classes and learned the basics of financial modeling, valuation, and startup financing.

Previously, Victoria worked for the Deutsche Bank Research Department and performed IT consulting for CapGemini’s Financial Services Division. Victoria holds a Bachelor’s Degree, Cum Laude, in Computer Science, with a minor in Mathematics, from Cornell University and an MBA, with honors, from Columbia Business School. Victoria is also on the Advisory Board of the Computing and Information Science (CIS) Department of Cornell University.