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If you’re starting a games company with a few friends, this is the best time to read through this article and then to take a look at our equity split calculator.
When a company gets started, the co-founders will split the 100% of shares between themselves. There are two types of co-founder equity splits. The “fair split,” which is either 50/50, or every founder gets 33, or 25, etc.
An optional approach is that you have the unequal division of shares. But the unequal doesn’t need to mean that it’s “unequal” per se.
Here’s an example of how the process of share splitting between founder could go.
The founding team believed that it’s best to delay the equity split because things are still unknown and changing. When they finally did split the equity, they took a very deliberate approach, fearing the effects that might emerge if any founder felt that the equity-split process was unfair.
In their discussions, the team delved into each founder’s past contributions, outside opportunities, preferences, and anticipated future contributions. They decided to split the equity unequally, with the co-founder CEO receiving more than twice the stake of the co-founder with the lowest stake.
Many founding teams care about displaying outwardly visible equality: not only does everyone gets the same equity share, but everyone also gets the same salary. This way, no one can say afterward that it wasn’t “fair.” The fair split is what we did at the start of Next Games. The company got founded by four co-founders, and each got 25% of the company.
Will some founders put in their own capital to fund the company? How will this “investment round” look like? The founder-based funding round was done at Next Games, where another co-founder and I invested 20,000 euros of our own money and got a few percents more than the other two co-founders.
An investor worry might arise here: An equal split can send worrisome signals about the team’s ability to negotiate with each other and to deal with difficult issues themselves. One way to mitigate these worries is to give 1% more to the CEO, so that at least one founder has more. This could give slightly more control to one person, especially in deadlock situations.
Things to weigh in
Here are some of the things to consider when you still haven’t decided on a fair or unequal split.
- What do you think YOU deserve? Does it matter if you have 35% or 25%? How will it feel day-to-day, at work or home, six months from now, one year, five years, $100m exit later? Let all of your co-founders think about this set of questions.
- Who is working on the company already without pay? Who is only part-time and joins when some investor money is in the bank?
- Who is taking the most risk? If someone says that leaving a job to start a company is risky, it might make sense to say that they are taking a risk. But the actions they take towards building the startup and how the effort they put in weighs more.
- Having a brilliant idea, especially in gaming, doesn’t amount to much. Unless a prototype has been out and there are metrics to back that the idea is superior. With metrics, the person who came up with the idea should be given more equity.
- You need to talk about the first ten years of the company, not what is happening now, or in the first year. The CEO will have less work than the developers in the first year. But after you raise funding, there will be more staff to take care of and salaries to pay. These responsibilities and burdens will be coming on to the CEO.
When thinking about individual founders, consider these:
- Long term: “In five years, this founder will be one of the most influential individuals, driving success for the company.”
- Similar:” This founder will be the least likely to still contribute to the success of the company in five years.”
- When things go to hell, who will be sacrificed? Who will go through hell, mentally?
Mistakes can be made
When founders are splitting the equity early in their company’s life, they face the heights of uncertainty. They will contemplate their business strategy and their roles within the team, about whether each founder will be fully committed to the startup, and about many more unknowns that will become clearer as they get to know each other in these new circumstances.
Things are even more uncertain for co-founders who have never worked together. Bypassing a serious dialogue about what each of the founders expects, wants or deserves might be easier in the short-term. But these calculations will might not be the right ones for the long-term health of the company.
Make sure that you are vesting the founder shares, with something similar to what investors will want to have in place once a founding round happens. Usually, the four-year vesting is expected with a one-year cliff, meaning that no founder will permanently get any of the shares in the first twelve months, but after the first year, there is a “cliff” moment where twelve months worth of shares become vested.
Note that the vesting will most likely start from scratch when a Seed investment round or a Series A round happens. Vesting from scratch occurs because investors want the founders to stick around for another four years to work on building the company.
Co-Founder Equity Split calculator
We here at Elite Game Developers have created an equity split calculator, based on some of the conditions we’ve seen at gaming companies.
Take a look at the calculator by going here.
Here’s an instructions video.
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