The Co-Founder Equity Script for Two Students Still in School

The conversation about how to split equity between two founders is one of the more consequential conversations of the early startup years, and it is one of the ones most often postponed until the postponement itself becomes the problem.

Two students building together will often work for months without ever formally agreeing on how ownership of the company will be divided, and by the time they finally have the conversation they have already accumulated enough asymmetries between them that a clean fifty-fifty split no longer feels fair, and any other split feels awkward to propose.

The result is a conversation that becomes more difficult the longer it is delayed, and one that occasionally ends friendships as well as companies.

The purpose of this piece is to give you a specific script for the conversation, so that you can have it early, keep it short, and get it done before the asymmetries have had time to compound. The script is not clever, and it is not designed to get you the best possible outcome for yourself, since equity conversations are not the kind of negotiation where getting a slightly better deal is worth the damage done to the relationship, and it is designed to produce an agreement that both of you can live with for the next several years, which is the actual measure of success.

The prerequisites

Before you have the conversation, both of you should sit alone with three questions for a day or two.

• What do you think each of you brings to the company that the other does not.

• What do you expect will change about your relative contributions over the next year.

• And what would you need in order to feel that the split is fair, even if the company grows into something unrecognisable.

Neither of you should come to the conversation without having thought these through, since off-the-cuff equity conversations tend to produce agreements that neither party actually believes in.

The actual conversation

The conversation itself should be scheduled as a specific meeting, ideally in person, and it should be given at least two hours of unhurried time.

Start by saying out loud that you both want the outcome to be one that lasts, and that either of you should feel comfortable pausing or restarting the conversation if it starts to feel bad.

Then walk through your answers to the three questions above, one person at a time, without interruption, since the goal in the first hour is only to understand each other's thinking, not to negotiate.

In the second hour, you can start to propose an actual split. Fifty-fifty is usually the right starting point for two students starting at the same time, and the burden of proof is on the person who wants a different split to explain why. If the answer is that one person has been working full time while the other has been part time, or one person is committing to the company after graduation while the other is not sure, then a split other than fifty-fifty may be reasonable, and the conversation should stay on those specific factors rather than on vague claims of one person contributing more.

Fifty-fifty is usually the right starting point for two students starting at the same time, and the burden of proof is on the person who wants a different split to explain why.

The vesting agreement

Whatever split you land on, both of you should agree to a vesting schedule, which is the mechanism that protects the company if one of you leaves later. A standard schedule is four years with a one year cliff, meaning neither of you fully own your equity until you have both been with the company for four years, and if either of you leaves in the first year you lose all of it. This sounds harsh in the abstract, but it is protecting both of you from the version of the story where one of you leaves in month four and walks away with half the company. Do not skip this step, and do not agree to a vesting schedule shorter than four years, no matter how much friends or mentors tell you that vesting is unnecessary at this stage.

The document

Whatever you agree to should be written down and signed by both of you, even if you have not yet incorporated the company. A one page document that describes the split, the vesting schedule, and what happens if one of you leaves early is enough for now, and you can convert it into proper legal documents when you incorporate. The written version protects both of you from the drift of memory over time, and the awkwardness of asking for a signature at the end of the conversation is much smaller than the awkwardness of trying to reconstruct the agreement months later when one of you remembers it differently.

What to do if you cannot agree

If the conversation does not produce an agreement both of you can live with, that is important information, and it is better to know now than to know a year in. Sometimes the honest outcome of the conversation is that you are not the right co-founders for each other, and while that is painful in the short term, it is much less painful than the alternative of building a company together on an unstable foundation. Founders who part ways at this stage usually stay friends, and often end up on much better companies with different co-founders later, so if the answer is that the arrangement will not work, take it as a signal to change course rather than as a failure.