Splitting co-founder equity with jellybeans

4 methods we tried to distribute startup shares among co-founders and why the jellybean method was the best.

Overview

Dilemma: How do we split equity fairly?

In this story, I’ll explain the different methods we tried to split up equity as fairly as we could in the early days of our startup, and how using jellybeans was the fairest way to do it.

Specifically, I’ll go over the pros & cons of a list of methods we tried:

1. Equal partners method
2. Dictator method
3. Online equity calculators
4. Jellybean method

The Equal Partners Method

In this model, equity is split equally among the partners.

Pros: immediately fair to all co-founders, equity shares & risks are divided equally.

Cons: no clear chain of command, difficult to justify if partners join at different times.

The equal partners method is great if you’ve got partners who are fully committed to staying in the business with you until the end of time.

But chances are, that’s not the case.

In any business, people come and go. For example, consider a group of 3 deciding to divide equity into 33% each. For awhile, this worked ok since group decisions always had 3 votes where the 3rd vote acted as the tiebreaker.

But then, one of the partners leaves. The remaining two partners are stuck with 50% each. A single disagreement would spell trouble for the business since there’s no way to break the tie.

Quick aside: When my brother and I disagreed on something and our 3rd partner chose to abstain, we had to settle the disagreement in a trial-by-combat (not really, we settled it by playing a game we invented called ping-pong chess where to take a piece, you had to score a point in ping-pong). But see how weird it can get when you don’t have a good way to break a tie?

Finally, what happens when you want to add a new partner? Should they still get equal shares even if a lot of work had been done by the original partners?

The best way I’ve seen to handle new partners is vesting. It’s a bit beyond the scope of this story, but it’s essentially a way to let people earn their shares over time. But you still need to determine how many shares a new partner is eligible to earn in the first place.

The Dictator Method

In this method, the majority of the equity (50.1% or more) lies with a single person. This means that whatever this person says is the direction the business will go.

Pros: clear chain of command, unified direction.

Cons: little personal investment from other co-founders, the business hinges on one person.

This method can be good if the lead person is an extremely driven individual. It’s even better if the lead is an enlightened individual who actively listens to the advice of their co-founders.

But this method falls short because (1) the business hinges on a single person and (2) it fails to keep talented co-founders in the long term despite good intentions.

I had a friend in grad school who won $10,000 from a pitch competition by beating me and my startup. He was the only person at his startup who had brought in any kind of revenue in the 2 years they’d been in operation.

But despite his efforts, he had the smallest share equity in his startup at 5% given how he was a new member and the original founder of the startup wanted to hold onto the majority of the company (which admittedly, I get — it would be difficult to let go of something you’ve worked on for 2 years of your life).

Although initially being fine with his position in the startup, my friend later confided that he didn’t feel like he was a true member of the team. One month later, his studies got more demanding, and he decided to quit to focus on earning his master’s degree.

In the end, the point of having equity isn’t just about how much shares are worth — in a startup with so few people, your equity is a literal number that indicates how much you’re part of a team. And it’s not just evaluated when you join — it’ll be re-evaluated again against every obstacle that arises in life.

Online Startup Equity Calculators

In this method, co-founders use an online equity calculator to determine how their startup should distribute shares.

Pros: simple Q&A style approach, questions can give basis for team discussion

Cons: question relevance varies depending on the nature of your startup, vulnerable to group-think, basis for suggested equity calculation is obscure

The best one we tried was the foundrs.com calculator. There’s also the TripleByte calculator if you’re interested in value over time, though it’s more for investors than co-founders.

The calculator has a list of questions that the team answers together like “Who’s the CEO?” or “Which founders are coding most of the site/app?”. Then after answering all the questions, the calculator will recommend what each founder’s equity % should be.

Here’s an example from foundrs.com:

For us, the distributions seemed reasonable, but we were unsure of how the percentages were calculated. We were uncomfortable with simply trusting the results of a questionnaire with the future of our business, especially since some of the questions didn’t quite apply to us (e.g. we intended to bootstrap to prove our business model before seeking any investor funding).

Still, the questions from the calculator were good questions to ask ourselves in the next and final method we chose:

The Jellybean Method

The jellybean method is a way to divide equity by distributing jellybeans (or gummy bears, or poker chips, or any other token) amongst team members.

Pros: takes into account everyone’s perspective on how to distribute equity, can be repeated if redistribution is needed

Cons: could still end up with equal partners or dictator situation especially if the team’s discussion isn’t thorough.

Here are the rules:

1. Each member is given 2 jellybeans each.
2. The first jellybean can go to whoever, including yourself.
3. The second jellybean must go to someone other than yourself.

For example, let’s say there are 4 co-founders (A, B, C, D) and each is given 2 jellybeans. In round 1, everyone was selfish and gave themselves a jellybean except person D, who gave it to person A. Then in round 2, A & B give theirs to D, while C & D give theirs to A. So now, we have:

Then, the co-founders discuss why they made their choices. While the jellybeans don’t have to exactly represent the distribution of equity, they should give a rough idea to what the distribution should be based on all the co-founders’ perspectives.

And for new partners or other reasons you might need to redistribute equity, just repeat this exercise.

This is how our team decided to distribute equity when we first started, and here’s the real final distribution:

We decided that no single founder should have complete control of the business (the dictator scenario), so founder A capped himself at 45% and gave his other 5% to founder D, bringing her up to 30%.

Meanwhile, founders B & C agreed on their distribution given that founder B had been with the company slightly longer than founder C though both had about equal contributions.

In the end, the group agreed that the distributions were fair and the company could move on to doing business.

Key Takeaways

1. Equal partners is difficult to justify since co-founders are rarely equal and join at different times.
2. The dictator method works only if the lead is an effective individual — otherwise, it falls short since other co-founders have little personal investment in the venture.
3. Online calculators asked good questions to suggest reasonable equity percentages. However, it was difficult for the group to simply accept the results without a basis for how they were calculated.
4. The jellybean method allows co-founders to consider each other’s perspectives. It also may be repeated when new partners join. When combined with good questions from online calculators, the jellybean method is the best way to determine co-founder equity.

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