Co-Founder Equity Splits

Alex Blumberg, formerly of This American Life and Planet Money is starting a new business. The business has something to do with creating a great network of podcasts (actually, three episodes in I’m not entirely sure but that is a matter for a future discussion). Naturally he is podcasting his own experience in this and I’ve been listening. What interested me today was, in fact, Episode 3 “How to divide an imaginary pie” which deals with Blumberg’s attempts to find a partner to help him with the business.

In his search, Blumberg meets Matt Lieber who as some experience in the area (a former radio producer) and is an MIT Sloan MBA graduate working at BCG. Never mind the advice of Y Combinator’s, Sam Altman in his Stanford startup class that you should get someone who is a long-standing and proven friend, Blumberg doesn’t appear to have that luxury. He’s not 23 years old. He’s already had an established career and has a family to worry about.

The episode is excellent because it gives an insight into the ‘dance’ that occurs regarding equity amongst co-founders. In this case, as Blumberg founded the company, he has to consider how much equity to cede to Lieber. Initially, he and Lieber are at odds — Blumberg offers him an ‘employee’s’ share only but eventually moves him up (and that isn’t really a spoiler as it is clear things work out by the fact the podcast exists).

The trade-offs in this decision were, in fact, modelled by Thomas Hellmann and Veikko Thiele who considered just how definite founders have to be about equity upfront and, in fact, they would suggest leaving that decision if there are significiant doubts about the skill of a founder. While Blumberg had known Lieber for a month, it strikes me that it was hard to evaluate those skills and maybe some more contingent form of equity such as options might have been appropriate.

In a follow-on paper, Hellman and Thiele strengthen the analogy between co-founder equity and marriage and see equity as a means of making it hard for partners to leave one another. I suspect Blumberg and all his partners will find that interesting reading.

Finally, Hellman and Noam Wasserman look at some empirical issues on the division of founder equity. They find, for example, that settling on founder equity at the outset and also more equal division of equity all lower eventual firm performance. This data spells some ominous clouds for Blumberg’s venture. That said, the fact that this is being done effectively in public does likely change incentives and relationship dynamics somewhat.