As I mentioned in my last post, I have some ideas for a startup, and I’m excited to start working on them.¹ Unfortunately, doing a startup raises a lot of questions that I, as a former wannabe philosophy professor, haven’t really considered. Since its probably not a good idea to dive in to a venture that I don’t really understand, it seems like I should spend some time wrestling with what we might call “startup questions.”
Lately, I’ve been wrestling with a startup question that I hope will be interesting to the startup community in general:
Should the “idea person” get more equity than the other co-founders simply because the startup is based on her idea?
Before we wrestle with this question, let me say a little more to clarify exactly what I’m asking here.
I’m asking whether having a good idea is itself a sufficient reason to get more equity. In other words, I’m asking if all other contributions are equal among co-founders, should the idea co-founder get extra equity? Or, to put the question a third way, I’m wondering whether it would make sense to give a person some equity for coming up with a good startup idea even if that person contributed nothing else to the success of the startup.²
The conventional answer to this question seems to be “yes.“³ Now, if it turns out that convention is correct and that the idea person should get some extra equity, this would be sweet for me because at this point, I suspect that I’ll be an idea person for my startup. Unfortunately, I’m not convinced that I should get extra equity simply for having an idea.
Here’s are two reasons I’m hesitant to call “moral dibs” on my extra idea-person-equity:
First, I don’t really feel responsible for the generation of my startup ideas. I didn’t sit around and think hard about “problems” that I could solve with a company. The ideas just sort of came to me.4 Since I didn’t really do any work to generate my startup ideas, it feels weird to get rewarded for it. For me, being rewarded for one of my startup ideas would kind of feel like getting rewarded for having a bowel movement. My response to such a prize would be, “Thanks for the reward, but this shit sort of just happened.”
A corollary of this point is that I’d have no problem demanding extra equity if I put a lot of work into coming up with a good idea. If I, for example, researched the various problems that industries or individuals are facing and used this information to come up with a startup idea, then I’d feel totally justified in asking for equity. In this case, however, I’m not getting equity simply for having an idea. Rather, I’m getting equity for work that I put into generating a good idea.5
The second reason I’m not convinced I should get extra equity is that I haven’t really come across any solid arguments to the contrary. In fact, the only real argument I’ve encountered seems to go something like: “Without the idea guy, the startup wouldn’t be possible, so the idea guy should definitely get more equity.“6
There’s got to be more to this argument if its going to be compelling. As it stands, the argument seems to assume that if a person makes a startup possible, then that person should get equity. That assumption is probably false since presumably we wouldn’t give equity to the idea guy’s parents, even though the startup wouldn’t be possible without the parent’s decision to bring an entrepreneur-child into the world.
For those two reasons, I don’t think that the idea person should get extra equity. Some might see this as kind of a radical position. It probably is, but don’t be offended. I’ve only thought about this question for an hour and I’m not even a “real entrepreneur” yet, so I’m very open to being wrong about this.7 Feel free to tell me I’m wrong or to tell me how you think about equity splits.
Of course, idea people may have other qualities that will earn them a larger share of the equity, but I’m not interested in those qualities. It might turn out, for example, that idea people are often more passionate about their startups and that this passion helps them work harder than other co-founders. If idea people tend to work harder, then it seems clear that they should get more equity because they work harder, but I’m not asking whether idea people who happen to work harder should get a higher equity share.
On the 152nd page of his book The Founder’s Dilemmas, Noam Wasserman reports that startups typically give the idea guy an extra 10-15% equity. Wasserman suspects that a part of the equity is given for “past contributions” (including the idea itself) and part of the equity is given out of “recognition that the idea person might be more likely to contribute important additional ideas in the future.”
Its possible that there’s something fishing going on with this distinction. Unfortunately, I don’t have time to address worries about this right now. If you don’t like my position, this distinction might be a good place to criticize me.
One of the founders at Crimson Solutions seemed to make an argument like this. Wasserman, The Founder’s Dilemmas, 152.
The scare quotes are for readers who don’t really like how I’m defining “real entrepreneur” in this sentence. Don’t worry, there’s no need to get philosophical. I’m not trying to define the term “entrepreneur.” All I’m trying to say is that I’m not working full time on a startup.