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When starting a new tech business alongside other co-founders, there is always the all-important question of how to divide company equity. This is one of the most frequently asked questions we encounter here at Aleph1.
In this article, we will explain how much equity to give co-founders in your tech company. Additionally, we will clarify who can be a co-founder in your startup in the first place, where you can find co-founders, and how you can be sure you are choosing the right one for your company.
If this topic is of interest to you, then read on to find out more!
Before we answer the question of who can be a co-founder in a tech startup, it is worth explaining what exactly the role entails. A technical co-founder is not just a developer who writes code. takes an active interest in the company and its future, helping to shape development strategies, assemble and organize development teams, and build the company’s MVP.
Now that we have explained a little about the role co-founders play in tech startups, we will consider three different types of technical co-founder roles: senior programmers, CTOs, and existing tech co-founders.
Senior programmers are developers with a minimum of five years of experience. Such individuals already have a large number of completed high quality projects under their belt and have most likely contended with the types of issues you are likely to face running your new startup.
This level of experience is critically important if start strongly with your business. Ideally, however, you do not want someone who only has a technical background. This knowledge is certainly valuable, but a tech co-founder should also have experience in team management.
Generally speaking, senior programmers will work as co-founders for a fairly small amount of equity. Nonetheless, you should still make sure to pay them a generous salary to encourage loyalty.
A chief technology officer, or CTO, is one step up from a senior programmer. These individuals are experienced programmers with a talent for seeing the big picture. They have a well-rounded background in tech and business, meaning they have a thorough understanding of programming,managing a team, and executing business strategy.
A good CTO should feel equally comfortable in team-building and developing programming processes. Because of their well-balanced skill set, CTOs are extremely valuable to all tech startups.
A CTO’s salary and equity share should reflect their value to your team. As such, hiring one for your startup is only the right choice if you can afford a substantial tech salary as well as a considerable amount of equity.
At last, we come to our third and final option: the existing tech co-founder. These individuals are another step above CTOs; rather than being just another employee on a regular salary, they are full partners in your startup. Tech co-founders share the responsibility of running the business, helping to shape your company with their own unique vision. Among other things, they will:
As you might expect, technical co-founder equity should be reasonably high since they share the responsibility of running the business with you. You should expect to have to allocateas much as 50% equity to these partners.
Now that we have explained the different types of co-founders you can hire for your company, it is worth considering the qualities you should look out for in a prospective business partner. As we have already mentioned, it is not enough for a co-founder to only bring technical knowledge to the table, as important as that knowledge is. So, what other skills should they possess?
To make sure you find a suitable co-founder for your startup, look out for someone who:
If you find someone who ticks all these boxes and who clearly has a vested interest in the company and not just the tech, you have probably found yourself the ideal co-founder!
So, you have found your dream tech co-founder and want to make them an offer to join your business. Now you may wonder how much equity to give a tech co-founder to ensure they are appropriately compensated.
As mentioned previously, when deciding how much equity to give a technical co-founder, the answer really depends on the type of role they fill, the experience they have, and the expertise they bring to the table. But how do you calculate the equity a co-founder should receive? And what does this percentage depend on?
The formula used to calculate the amount of equity a co-founder should receive is called the Founders Pie Calculator. It involves a few key steps, which we will outline below:
Consider the different aspects of the job. How important is each one to your business on a scale of one to ten? Once you’ve answered that question, consider how you would rate your co-founder’s performance in each, also on a scale of one to ten. The aspects you should take into consideration are:
Once you have rated the importance of each of these aspects and your partner’s performance in each, multiply each corresponding set of figures together. Next, add these numbers together and find the percentage. This is how much equity you should allocate foryour partner.
Imagine you have a team composed of three people: the founder, co-founder, and a market researcher. Say the founder had the idea for their business, the co-founder helped bring it into action, and the researcher did the technical research to make that happen. After calculating their importance, you might have something like this:
|Commitment and risk||7||5||5||0|
Next, calculate the equity percentages for each team member. You should find these are your results:
|Commitment and risk||7||35||35||0|
If you are building your own tech startup and are looking for a tech solutions consultancy service to help boost your business, look no further. Here at Aleph1, we have helped a great number of companies develop their services. Fintech businesses, NFT platforms, blockchain developers – we have helped all sorts of tech companies get off to a strongstart.
To find out more about the benefits, you will receive as one of our valued customers, reach out today!
Having a reliable, trustworthy co-founder is essential when running a startup. You should make sure you find someone fit for the job, with all the experience and qualifications you need.. That being said, it is also essential to make sure you compensate them appropriately for their work. That is where equity comes in.
Allocatingyour co-founder a reasonable amount of equity will ensure their loyalty to your company. When calculating this, you should consider their experience and how much they bring to the company.
How much equity should you give a founding team?
The amount of technical co-founder startup equity you should give members of your team depends on a few key factors. These include their level of experience, skill level, and how much they contribute to the business. If you are unsure of how to calculate this fairly, Aleph1 is more than happy to help.
How much equity should I give early founders?
While you are still starting up, you likely will not have the capital to give substantial equity to early founders. Consider making up the difference with a competitive salary, instead.
How much should a technical co-founder equity split be?
There are a variety of calculators out there you can use to figure out how to split technical co-founder equity. This article has taken Frank Demmler’s Founders Pie Calculator as an example, but there are other options out there. You can also ask our experts for advice if you would like a second opinion on the startup equity split.
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