How Much to Give to Your Tech Partner?

One of the most important choices a founder will make in the early stages of building a startup is how to split equity between founders, particularly when inviting a technical co-founder. It means way more than just financial ownership; it reflects the value and contribution of each partner. For non-technical founders, the expertise a tech cofounder brings may be crucial to translating the idea into a fully workable product. Still, the question of how much equity to give up is always a balance between acknowledging the role of a technical partner and preserving the opportunities for future growth.

In this article, we look at why equity matters in startup partnerships, what needs to be considered when determining equity splits, and how to handle the negotiation phase. Recognize common equity distribution models, formalize your agreements, and set a tremendous, very successful co-founder relationship.

Why Equity Matters in a Startup Partnership

Equity isn’t just about ownership for the sake of ownership. It is an important tool that defines commitment, aligns incentives, and gets a base of trusting relationships within a startup team. The promise of equity allows sharing in the potential success of a usually resource-scarce business with founders and early-stage team members-to-be as a premium for the risk and effort from the outset. This is especially valid in the case of co-founders but even more so when the roles are sharply divided, such as having a technical co-founder.

The technical co-founder often brings to the table a special expertise in building out and scaling the core product of one’s company. This, in turn, makes them indivisible from the future growth of that very company. While you recognize their contribution through equity, you ensure they will be committed and motivated for a long time ahead.

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The technical co-founder equity, when paired with partnership, serves as a mechanism of balance in decision-making power. A well-structured equity split would thus mean that either of the parties would be interested in the company’s success, hence creating a sense of responsibility or ownership. 

It is especially important in the startup stage, where choices related to product trajectory and organizational direction are critical. Equity allocation is an essential element of partnership success, that, when performed wisely, drives funding abilities, talent acquisition, and business growth. A thoughtful equity-sharing approach is a vital mechanism to ensure that both founders go all right up to each of their successes. If you are wondering how to find a technical cofounder, this gets even more important.

Things to Consider Before Determining Equity Split

The issue of equity division among co-founders is multi-dimensional and goes beyond just financial investments. Here are the things you need to consider:

Skillset and expertise

Evaluate the unique skills each co-founder brings to the business. For example, one co-founder might excel in technical development, creating the product, while the other focuses on business development and strategy. It’s essential to acknowledge the value of these contributions when deciding on equity distribution.

While some founders default to an equal split, Carta statistics show otherwise. Only 41% of two-founder teams split the equity equally and that percentage drops significantly for teams with three, four, or five co-founders.

Time commitment and effort

Consider the time each co-founder invests. The equity must reflect commitment or “sweat equity.” If the technical co-founder works full time, while the non-technical founder manages other aspects, then is it a full-time effort?

Risk and financial investment

Factor in the financial risks that each founder takes concerning initial investments or salary sacrifices made by them in the venture. Large financial contributions might need a more significant equity share.

The position of the long-term growth

Equity should account for the future role of each co-founder. To reflect their ongoing contributions in the equity split, the technical co-founder must lead product scaling and oversee technical management in the long run. Ultimately, the distribution of equity should represent the value each co-founder brings both now and in the future, fostering a balanced and enduring partnership as the startup evolves.

Typically, it takes two or three rounds of financing before external investors collectively hold more than 50% of a venture’s equity, making it critical to establish a strong foundation between co-founders early on.

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Common Equity Distribution Models for Tech Co-Founders

In dividing equity among co-founders, some different models can help inform a decision. Here are some common equity distribution models utilized by startups:

Equal split model
All co-founders receive equal equity with equality. In this model, however, individual contributions get lost, especially when one founder contributes more to the development.

Role-based split model
In this model, equity is divided concerning specific roles played by each co-founder. A technical co-founder would have a greater share for creating a product, while a non-technical co-founder would take a smaller percentage for business operations. This model may be too arguable while trying to quantify the role contribution.

Performance-based vesting
Equity is granted on specific performance criteria. Founders vest, or earn, their equity over a stated period, normally four years. This model rewards long-term commitment and covers the startup in case one of the founders decides to leave early.

The best model for you, of course, will depend on the dynamic of your founding team. Open discussions will help ensure the model you choose aligns with your vision for the company in the long term.

How to Formalize the Equity Agreement with Your Technology Partner

After you negotiate the equity split with your co-founders, you can legally formalize the agreement in several ways. In doing so, you will be protecting both parties and setting clear terms to avoid disputes later on. Here’s how to formalize your equity agreement in essential steps:

Founders’ agreement:

Next, put in writing an agreement describing the rights, responsibilities, and ownership interests of the co-founders. In other words, the agreement should spell out equity split, roles, and decision-making processes, among other imperative issues. More importantly, one should consult a startup lawyer to ensure the agreement is exhaustive.

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Prepare a vesting schedule:

You should apply a vesting schedule, generally four years with one year for the cliff, as an incentive for long-term commitment. It helps protect the company by ensuring the founders earn equity over time.

Define the terms (e.g., exit clauses and buy-back rights):

Spell out what happens if a co-founder were to leave, including buy-back options for the company or remaining founders to buy out shares for control of ownership.

Establish ownership of intellectual property.

Specify who owns the IP developed for the startup. Generally, the company should hold all IP rights to prevent complications if a founder departs.

Consult a lawyer:

Work with an attorney to ensure that the agreement is legally binding and adheres to all relevant laws, and also tends to reassure investors of sound equity structure.

Review and update the agreement over time:

Periodically review the agreement to update and rescale with the startup, with newer investments or people changing so that terms can remain relevant and fairest.

The formalization of the equity agreement is not only a legal formality but forms the very basis of a strong and sustainable partnership between founders. Both technical and non-technical co-founders clearly define the terms, enabling them to confidently move forward while knowing their contributions and commitments are legally protected.

Conclusion

The founders must carefully decide on equity distribution, as it can heavily determine the startup’s trajectory. Founders should consider key factors, such as what skills each partner brings to the business, how much time each partner commits, the financial risks each partner takes, and the future roles each partner will likely play in the business. In so doing, the founders will have an equitable platform for equity distribution while mulling over contributions made and long-term objectives. 

Therefore, the keys to a healthy co-founder relationship are to negotiate a co-founder agreement, built on the right fairness model based on open discussions, and legally codify it. In other words, an appropriate equity split keeps the partners interested in the success of the startup and helps establish trust; it also lays the foundation for attracting investors and top talent as the startup matures. Navigating the process carefully you can have a general partnership sit in the foreground and your business thrive.