Important Discussions Before Starting a Startup

Three Important Discussions

Let’s say you want to build a high-growth, high-intensity, high-risk startup, and you have a great co-founder. What are some important discussions you want to have before starting a company together? There are three things you should ensure you’re all in agreement on before the startup gets too far along: 1. The equity split, 2. The CEO title, and 3. The vesting agreement.

Equity Split

Many co-founders like to put off the equity split (who owns how much of the company) for a very long time, but this is not a discussion that gets easier with time. Ideally, you want to set the equity split within the first few weeks of working together, and the best way to think about this is that the default equity allocation should be 50/50.

There isn’t much reason to deviate from a near equal equity split early on because all the work is ahead of you. Even if you’ve made some progress on your own and are thinking about taking more equity, I would advise you not to do so because it takes 7-10 years to build a company of great value. Startups are a long-term game, and you win by making the best long-term decisions.

If you aren’t willing to give your co-founder an equal share of the equity, I think that should make you think hard about whether or not you want them as a co-founder. Your co-founder is who you are going to war with, who will help you decide the most important questions in your company, and who you will celebrate with when you succeed. So, if you have a great co-founder, make them a 50/50 equity partner.

CEO Title

The second thing you want to discuss is who should be the CEO. This can sometimes be an uncomfortable discussion, but to be honest, it’s a bit of a red flag if it gets uncomfortable because the CEO title doesn’t really matter early on. You’re all going to be doing plenty of unglamorous grunt work.

One exception is if you need to make sales; in this case, it’s usually a good idea for whoever is going to be talking to users to be the CEO because customers will feel a little more flattered if the CEO is convincing them. Or, if you’re pitching investors, it’s usually better for whoever is going to be leading fundraising to be the CEO because investors want to see that there’s a clear leader and a clear final decision maker.

Where you run into trouble is when both co-founders really want to be the CEO, and you end up with a lot of friction. This is a bad sign. So, be honest with yourselves, if being the CEO is extremely important to you, and you both feel that way, you’re not good co-founders for each other. Just avoid all that pain by not starting a company together.

Vesting Agreement

Now you’re finally ready to formalize things by incorporating a company and setting up a vesting agreement (vesting means you get shares in the company over a period of time). Every co-founder must have vesting, which essentially acts as a pre-negotiation of what will happen if your relationship falls apart and one of you leaves.

The usual stance on vesting is that it takes four years for a co-founder to earn the full amount of equity. So if you leave after one year, you keep 25% of the equity, and if you leave after two years, you keep 50%, and so on.

Suppose you don’t do this and have a major fallout with one co-founder leaving with half the company. In this case, you will have dead weight on your equity table, and it’ll be very difficult to get investors to fund you. So the number one piece of advice to prevent that is to have vesting so people can quit in an orderly manner.

Making Things Real

When exactly you should transition from hanging out to having these important discussions is up to you, but once you’ve made the commitment to yourself and your co-founder that you’re going to build a company together, that’s the trigger to start making things real by completing the legal and paperwork matters mentioned above.