Selecting the right co-founder and how to make an agreement

Please bear in mind that the content presented here reflects solely personal opinions and classifications based on individual experiences. It's important to acknowledge that there may be multiple perspectives on the matter at hand.

Most founders I've encountered experience varying levels of stress in their lives. For solo founders, this stress can be even more profound. That's why we consistently recommend that talented solo founders in the initial stages seek out a compatible co-founder.

A co-founder is an individual who collaborates in establishing and managing a startup company alongside one or more partners. They often occupy critical positions within the company, such as CEO, CTO, or COO, and play a pivotal role in its strategic decision-making process.

Having a co-founder early in a startup can have several functional and psychological benefits. In fact, having a co-founder can provide a strong support system, sharing not only the workload but also the inherent risks and uncertainties that come with any new venture. This shared experience fosters emotional support and motivation, especially during challenging times. Furthermore, a co-founder brings a different perspective to the table, which can spark creative solutions and help mitigate feelings of isolation and burnout. Ultimately, having a co-founder fosters a sense of accountability and shared ownership, motivating both partners to work harder and achieve the startup’s goals.

In the process of validating a startup idea, persuading a high-caliber individual to join as a co-founder is a critical step in what we refer to as the “validation circle.” This concept will be explored further in an upcoming article.

While finding a co-founder can be a huge asset, choosing the wrong one can have serious consequences. Differences in vision, values, or work style can easily lead to conflicts and tension within the startup. This can be detrimental not only to the company’s success but also to the mental well-being of the co-founders themselves. Additionally, mismatched expectations around roles, compensation, and equity can be a recipe for disagreements and further tension. To prevent these issues, open and honest communication from the outset is crucial. Establishing clear roles, expectations, and agreements early on can help ensure everyone is on the same page and working towards the same goals.

When would be the right time to bring in a co-founder?

Once you have a clear vision for your startup and a solid understanding of the skills and expertise needed for success, you can begin to identify the ideal co-founder profile. For example, if your startup focuses on a new technology, a co-founder with a strong engineering or software development background becomes essential to bring your product to market. I would say the best time to find a co-founder is after completing the validation circle in the idea phase; you’ll have a much clearer understanding of your startup’s needs. This solidified vision will help you identify the ideal co-founder with complementary skills – someone who fills the gaps in your expertise, whether that's marketing, finance, or operations. Building a founding team with diverse strengths is a powerful way to mitigate risk and propel your startup toward success.

As mentioned, picking a good co-founder for your startup is an important decision that can have a significant impact on the success of your business. Here are some tips on how to pick a good co-founder:

• Look for candidates with complementing skills:Choose a co-founder with skills and experience that complement your own. This can help fill gaps in your skill set and make your team more well-rounded.
• Share a common vision:Choose a co-founder who shares your passion for the business and your vision for the future. This will help ensure that you are both working towards the same goal.
• Establish trust:Choose a co-founder with whom you have preliminary trust (or more) and who you believe will act with integrity. Trust is essential in any business partnership.
• Good communicator:Look for a co-founder who is a good communicator, both in terms of being able to express themselves clearly and being able to listen and consider other people's perspectives.
• Share similar values:Choose a co-founder who shares your values and work ethic. This can help ensure that you are both on the same page regarding the direction of the business and how to achieve your goals.
• Understand and respect roles:Clearly define the roles and responsibilities of each co-founder together and make sure that all parties are comfortable with their assigned roles.
• Test the waters:Before making a final decision, work together on a small project or task. This will give you a sense of how well you work together.

Dividing equity among co-founders can pose challenges due to the need to assess the comparative worth of each co-founder's input to the startup. Maintaining transparent communication with co-founders is vital, facilitating collaborative efforts to devise an equitable equity distribution. Seeking guidance from a knowledgeable mentor, preferably a successful entrepreneur who shares a positive relationship with his/her co-founder, is advisable. This ensures that the equity allocation is fair for all stakeholders. Factors that may be considered when determining equity splits could include the following (or more):

Here are some key factors to consider when determining equity splits:

• Timing and Effort:A co-founder who joined at the idea stage and has been working full-time will likely have a larger stake than someone who joined later or works part-time. The amount of time and effort invested should be a major factor. Put a $ value for who came first.
• Time spent:It is a good practice to take time spent on the venture as one of the KPIs when calculating the cofounder share. Put down a $ value for this.
• Knowledge and Expertise:The specific skills and knowledge each co-founder brings to the table are crucial. For example, if your startup hinges on a new technology, an engineering or software development background might be more valuable than marketing expertise at this stage, or the opposite might be true! Put a $ value for this.
• Intellectual Property:If a co-founder has developed or contributed patents or other intellectual property, they may be entitled to a larger equity stake than a co-founder who has not. Put a $ value for this.
• Experience:Relevant industry experience can be a significant asset, potentially justifying a larger stake. Put a $ value for this.
• Capital:If a co-founder contributes a significant amount of capital to the startup, they may be entitled to a larger equity stake. This is already in $!

By considering these factors, you can arrive at a more quantified assessment of each co-founder's contribution. This will provide a clearer basis for negotiating an equitable split. Remember, equity splits can be flexible and adjusted over time to reflect changes in contributions. It's essential to document the agreed-upon equity split in a written agreement and review it periodically. This ensures the split continues to reflect the value each co-founder brings.

Finally, while agreeing on the equity split based on discussed factors is a positive step, it doesn't ensure the commitment of cofounders. Therefore, implementing a vesting schedule is essential to determine when each cofounder's equity will be fully owned. This schedule outlines the timeline for the gradual acquisition of shares by cofounders. It's important to establish clear conditions regarding the violation of time, financial, and effort commitments to avoid potential conflicts. Sometimes, cofounders may fail to fulfill their promises to join due to various reasons. In extreme cases, they may only decide to join after significant fundraising, demanding excessive salaries, which could be unfair unless agreed upon beforehand.

Here are 10 examples of famous startups that vary between product-based and service-based startups to illustrate how the equity split is done in the very early stage of the startup. Note that this changes over time due to several factors:

• Uber: Travis Kalanick and Garrett Camp - 50/50 equity ratio - Service Based
• Airbnb: Brian Chesky, Joe Gebbia, and Nathan Blecharczyk - 33.33/33.33/33.33 equity ratio - Service Based
• Dropbox: Drew Houston and Arash Ferdowsi - 50/50 equity ratio - Product Based
• Slack: Stewart Butterfield, Eric Costello, Cal Henderson, and Serguei Mourachov - 25/25/25/25 equity ratio - Product Based
• SpaceX: Elon Musk - 100% equity ratio - Product Based
• Instagram: Kevin Systrom and Mike Krieger - 50/50 equity ratio - Product Based
• Snapchat: Evan Spiegel, Bobby Murphy, and Reggie Brown - 30/30/40 equity ratio - Product Based
• Spotify: Daniel Ek and Martin Lorentzon - 50/50 equity ratio - Service Based
• WeWork: Adam Neumann and Miguel McKelvey - 50/50 equity ratio - Service Based
• Tesla: Elon Musk, JB Straubel, Martin Eberhard, and Marc Tarpenning - 33.33/33.33/16.66/16.66 equity ratio - Product Based.

Original article can be found here written by Eng. Walid Khalil