Negotiating equity splits at UpDown
The UpDown case is a familiar scenario for startup companies. At the early stages of an idea, emotions run high, and those emotions aren’t always helpful once the idea comes to fruition as an actual company. UpDown also shows that past experience doesn’t always translate into founders learning from earlier mistakes when a new idea takes shape. When a group gathers around a promising idea, everyone is excited, and the goal of building something bigger and better tends to bring people together — which is exactly the point where naivety gets expensive unless terms and expectations are established early. No two startup stories are the same, and the fluid change of opinions along the way, if not managed from the start, can become the thing that ends a startup.
Equity-split terms need to be established as early as possible to avoid what can turn into deeply personal disputes among founders. It’s not just about setting the initial split — it’s about laying the groundwork for how that split evolves. Founders should build their equity term sheets to account for changing workload, responsibilities, and time invested. These aspects are hard to anticipate at the very beginning, which is exactly why a logical framework gives founders the upper hand.
UpDown had three equity holders — Michael, Phuc, and Georg — plus an angel investor, Joachim, who provided funding in exchange for 20% equity on a hands-off basis. The three founders agreed on a set of rules in a one-page partnership agreement covering basic principles and responsibilities. Michael was the most passionate and most involved in getting UpDown off the ground, regularly putting in extra hours meeting angel investors and doing the work to get the business moving. Georg and Phuc were largely hands-off by comparison.
Georg met a few angel investors but didn’t follow up with more serious ones, and he didn’t cut a vacation short when Michael landed initial funding. Phuc had less interest in UpDown to begin with — he wanted the others to back his own idea for an event-organizing social network — and, as the group’s programmer, wanted to be compensated for the time he took off his consulting business to work on UpDown. All three had agreed to work on the startup equally, but Michael was clearly putting in the most work.
Their level of interest and drive varied, even if their intentions pointed in the same direction. Early employees’ interests can differ significantly based on their strengths and focus, and in UpDown’s case that difference is exactly what could have complicated negotiations if it hadn’t been addressed clearly from the start.
The initial equity split was equal across the three founders. That could have worked up to a point, but once external capital came in, the split should have shifted to reflect performance — a founder doing the bare minimum shouldn’t hold an equal share. UpDown should have adopted a performance-based compensation plan that divided equity by contribution. An alternative worth considering: avoid splitting equity at all until the business starts generating returns, then divide it based on performance against a framework agreed on in advance.
The UpDown team
To think through a workable framework for splitting UpDown’s equity, it helps to look at each founder’s strengths and weaknesses.
Michael — Strengths: recognized the market opportunity and the potential for commission-based returns; brought sales and business-development experience to marketing the product and raising investment. Weaknesses: limited product-development expertise and, based on prior startups, a tendency to blame others when team members weren’t participating at his pace, without accounting for the fact that others had other commitments.
Georg — Strengths: product-development expertise and market strategy; willing to work on the project unpaid, as a hobby, until it looked feasible. Weaknesses: struggled to maintain business relationships and stay focused on the project; in the early stages, Georg — a former founder — contributed less than Michael, yet Michael wanted to keep him on given their close relationship.
Phuc — Strengths: strong systems and development expertise, comfortable in any business context. Weaknesses: not a natural leader, and more comfortable executing in the background than driving decisions.
Future risks
Risks vary depending on the direction Michael chooses to take the company. Pushing for more equity could push other founders to walk away or band together against him. If Joachim fails to deliver the funding UpDown needs to operate, Michael is left searching for other investors or shelving the idea entirely. There’s also an opportunity-cost risk: if Michael feels the team isn’t working equally hard, he has to weigh whether his own skills would be better spent elsewhere.
Transaction costs of negotiation
Because the parties can negotiate directly as partners in the same company, transaction costs of renegotiating UpDown’s equity split would be minimal — though there may be real costs to the relationships involved. Michael clearly felt he was doing more work than the other two and should be compensated with more equity for it. Early on, the extra share he had in mind was around 5%; by the time he was seriously considering renegotiating, that number had crept toward 9% in his own thinking, though presumably not everyone would agree.
There’s never an ideal time to negotiate an equity split — these conversations are usually complex and emotionally charged. The skill is in choosing a moment that causes the least disruption. For UpDown, before taking any next steps, this conversation needed to happen — ideally, it would have happened much earlier.
Even more important than timing is how the agreement itself is crafted. One workable framework breaks down into three priorities, not in order of importance:
- Phuc needs a salary structure that lets him focus on the company.
- Georg needs to commit fully to the project.
- Michael needs to step back and delegate some responsibilities to Georg.
For Phuc, the idea is to route part of his compensation through a systems consulting contract with his own company, with Phuc taking on all of UpDown’s system functions as its de facto CTO. The rest of his compensation would split between equity and a $1,500 monthly stipend, with terms to be renegotiated once the business starts generating revenue.
For Georg, the agreement should establish and solidify his commitment — clear, agreed-upon responsibilities that give Michael the assurance he isn’t the only one working hard toward the company’s goals, and that give the eventual equity split an objective frame of reference.
How should Michael approach this?
Michael needs to do something he should have done long ago: establish clear roles and expectations so the equity split can be objective, rather than something that lives in a single page of vague terms. The lack of detail and specificity at the outset — common in early-stage companies — is what put him in this position.
The core question Michael needs to keep in mind is how fair and objective people can really be about their own perceived contribution and desired compensation. Avoiding rising tension requires a framework that goes beyond a simple equal split or an informal “you get a bit more because you’re the CEO” arrangement.
If this groundwork wasn’t laid at the start, it needs to happen now. Michael should begin by establishing clear roles and expectations tied to equity and compensation — and, most importantly, spell out the consequences for failing to meet the agreement, so there’s no need to revisit terms later from what would likely be a far more subjective footing.