daily articles for founders

Ideas and equity split  

Manu Kumar, serial entrepreneur and VC, makes the case that ideas do matter:

Ideas and Execution are Yin and Yang of the startup world. You need both in order to make magic happen. You need the right idea and the right team that is capable of executing on that right idea. One without the other will fall flat on its face eventually. You may have a brilliant idea, but if you can’t execute it, it’s not going to happen. On the contrary, and this is what people forget, that you might have an absolutely stellar team, but if the idea isn’t right, even a stellar team isn’t going to be able to pull it off.

He makes very good points (it's worth reading the full article), but I can't help the feeling he's arguing against a straw man. I don't believe anyone has ever claimed that having the right idea doesn't matter at all. Of course it does. We finally get to the point of the argument near the end of the article:

And it is because ideas matter that founders’ equity splits should also reflect that. If one person has an idea and brings in one or two more co-founders to join in, even if nothing is built yet, it shouldn’t be an even equity split. In fact, it should almost never be an even equity split:

The reason why people will say that ideas don't matter at that very early stage is because:

  1. You don't know if your idea is any good at that point. You may have to iterate several times and transform the idea through and through before it is any good. Why, then, should the person with the initial seed idea be rewarded more for just contributing what is most likely a bad initial idea?
  2. Even if the idea is brilliant, it's the team's execution that will make it come alive. The idea by itself is worthless. If you claim you can recruit another equally brilliant team, that is an argument for giving your current partner less equity (maybe). But recruiting an awesome team is execution, not ideation.
  3. On the other hand, a team that can execute successfully will squeeze at least moderate success even out of a mediocre idea, or will iterate over to a better idea together.

Ideas matter, but they don't matter enough to be worth having these arguments over. The real reason why it might make sense to split the equity unevenly, if you even want to, is that people will join with different levels of skill and experience, and at different stages of progress.

I really do think that this debate of ideas over execution is completely outweighed by the consideration of what sort of relationship you have with your cofounder(s). Arguing over percentages is only worth doing in the context of an interest-based relationship, as I've argued here.

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