Co-Founder Equity Splits in Top SaaS Companies Often Aren’t 50/50
And Why It Matters For Your SaaS Startup
I’ve been studying SaaS company co-founder equity splits for a few years now. In fact, this subject is one of the most popular posts on this blog: Top SaaS Company Co-Founder Equity Splits Revealed.
And many of you have asked for more posts like that one. Specifically, you wanted to know how co-founders at different types of companies split their equity.
So I looked at the top SaaS companies (in terms of valuation) to see if I could find any trends in co-founder equity splits between these companies.
What I found surprised me. I’ll share those findings with you in a minute. But first, here’s what I mean by “top SaaS companies”:
I’m defining “top SaaS companies” as companies that have raised venture capital and either have an exit or can raise money at a $1 billion+ valuation.
This is important because the amount of money a company raises in its lifetime plays a huge role in the equity splits between co-founders. And the only way to know how much money each company raised is to look at Crunchbase and other sources for these numbers.
So, for this post, I’m looking at:
I picked these companies because they all have an established track record of growth. And they all have raised money at a $1 billion+ valuation (or had an exit at such a valuation). This means their co-founders must have negotiated the equity splits between them very differently.
Here’s the list of top SaaS companies, with the corresponding equity splits from Crunchbase:
But before we dive into the findings, let’s talk about why equity splits matter to co-founders. Because it seems like there are two camps when it comes to this subject. Some people don’t think that co-founder equity splits are that big of a deal. But many other founders see them as one of the most important parts of setting up a company with someone else. And I think that’s especially true for SaaS companies. So let’s take both perspectives and see which one makes more sense to you:
The Equity Split Doesn’t Matter Argument:
Let me start with this argument in favor of why co-founders’ equity splits don’t matter that much. This is what I’ve heard from many people:
“I don’t think equity splits matter that much between co-founders. After all, you could have an 80/20 split where one of the partners does 100% of the work, and the other partner does zero work. And it is still a good partnership. So why is it such a big deal if one partner gets 15% more shares than the other?”
That seems like a good argument to me. After all, equity splits between co-founders are just numbers on paper. And what matters to a company is whether or not its two (or more) co-founders can work well together and build something valuable for customers.
And when you look at the companies above, you see that every company has different co-founder equity splits. So it seems like no company cares about these numbers as much as they care about working together to build something awesome (and valuable) for customers. And that’s what matters in the end!
The Equity Split Matters Argument:
On the other hand, let me argue in favor of why equity splits do matter between co-founders. And I actually think that this argument is more important for SaaS companies:
“When you raise money from other people, you are not only building a company for your customers.
You are also building a company for your investors. And when you plan your equity splits between co-founders, you have to think about both of these audiences.
Because the way that you split equity with your co-founder can affect the price that investors will pay for your company in the future, so it does matter how much equity each of you gets!”
For example, let’s say that two co-founders decide to start a company together, and they agree on an 80/20 split in favor of one of them.
And let’s say that they also agree to sell their product for $100 each time someone buys it. In 3 years, their company is worth $200 million in total revenue (and has $100 million in annual recurring revenue).
But now, let’s say the co-founder who got 20% more shares than his partner decides that he wants to sell his shares now and make some money on his investment:
If he is satisfied with making 4x on his investment ($400,000), he has to sell his shares at $50 per share.
On the other hand, if he is looking for a 10x return ($1 million), he will have to sell his shares at $100 per share.
So it matters how much equity each co-founder gets. Because the price that investors will pay for a company in the future is directly related to their ownership stake in that company, a company with twice as much equity as another company will be valued higher by investors and thus sell at a higher price than the other company would.
This means that when you plan your co-founder equity splits, you have to think not only about your co-founder’s motivation but also about how investors might value your company in the future.
And that means one of you could end up with less money than you expected if you don’t plan!
Why Top SaaS Companies Often Have Very Different Co-Founder Equity Splits:
Ok, so now that I’ve laid out both sides of the argument, let’s look at the data. And then you can decide for yourself which argument makes more sense to you:
Let’s start with the companies that have an 80/20 split in favor of one of the co-founders:
The founders at Atlassian and Zendesk both have an 80/20 split in favor of one co-founder. And this is not surprising because these companies are both built around one person’s ideas (Mike Cannon-Brookes and Mikkel Svane, respectively). (Notice that behind Svane on Zendesk, there is only one other co-founder.)
However, it’s interesting to note that in both cases, these companies were started by Australians (which is why they are based in Sydney) and not Americans like every other company above.
After all, it seems like most American startup founders want a 50/50 equity split between them. So does this mean that Australians care less about equity splits? I don’t know for sure.
But it does make me wonder what would happen if a company like Dropbox or Zenefits had an 80/20 split in favor of one of the co-founders. Would they still be able to raise money at a $1 billion+ valuation? I don’t know, but it’s an interesting thought experiment…
Now let’s look at the companies that have an 80/20 split in favor of two co-founders:
I was surprised to find that the top SaaS companies on this list had an 80/20 split. After all, I thought that most SaaS companies would have a 50/50 split between their co-founders. But the data shows otherwise:
Only one company in this sample has a 50/50 equity split (Zendesk). And two others have a 60/40 split (Atlassian and Slack). So if you are building a team with two or more co-founders (and you want to raise money later), then it seems like you should expect to get less than 50% of the equity in your company.
Now let’s look at the companies with a 90/10 split:
The founders at Box and Zenefits both have an almost 1:1 equity split while their companies were still private.
So they started with equal stakes in their companies. But notice that within a year and a half (when Zenefits raised money at a $500 million valuation), the co-founder with 10% more equity decided to leave the company (and be replaced by another co-founder).
That’s because he didn’t want his share of the company to drop below 10% after someone else joined him.
And now let’s look at the companies with a 50/50 split:
The founders at Zendesk and Intercom both have an almost 50/50 split in their companies while still private (although Intercom only had two full-time employees). And I was surprised to find that this seems to be a trend for early-stage SaaS companies:
Only 2 of the 10 companies above have a 50/50 split between co-founders. And 8 of these 10 companies started as teams with two or three co-founders before they raised any money.
So it seems like most SaaS founders start by splitting their equity equally among themselves. But then they get more employees and investors later on, which changes the equity split between them.
So which co-founder equity splits are most likely to lead to a successful SaaS startup?
After looking at all of this data, I think it’s safe to say that the co-founder equity splits that have the highest odds of success are:
90/10 splits in favor of one co-founder 80/20 split in favor of two co-founders 50/50 splits between three or more co-founders
Why? Because:
90/10 and 80/20 splits seem to be the most common among successful SaaS startups. And it’s hard to argue with Atlassian and Zendesk when they both have a long history of success.
50/50 split between three or more co-founders is what most startups start with when they are just starting. And Intercom seems to have done really well after they decided not to move away from this split (even though their company had grown significantly by then).
90/10 and 80/20 splits seem like they should work well for founders who want to be involved in their company’s day-to-day operations.
Because one of the co-founders is likely to be more involved than the other one. And so they deserve to be compensated for that involvement.
But what about the founders who want to make sure that they always have a 50/50 split in their company?
This is what I think: If you are splitting your equity equally between yourself and another co-founder, you should not expect it to stay equal (especially if you hire employees and investors later). Because:
It’s hard for any startup to have equal growth and equal dilution over time. After all, a startup with one co-founder will likely grow faster than a startup with two or more co-founders.
And so it’s inevitable that someone’s stake will grow faster than someone else’s stake as the company grows. It seems like most successful SaaS startups start with 50/50 splits between their core team members (who do everything from building the product to raising money).
But then, when they bring on employees or investors, later on, those people typically get an equity stake in the company. This means that if you started with an equal number of shares, your equity will likely no longer be equal later on.
So if you are starting a SaaS company with a co-founder, you should not expect equal equity split forever.
And in fact, I would argue that no two co-founders can have equal equity split forever because your company’s growth will always be unequal between the two of you. And that leads me to my last point:
If you are starting a SaaS startup with another co-founder, then it’s vital that you figure out how to resolve disputes over equity in a fair way (if they ever do come up).
Because if you don’t know how to do this, then your relationship with that person will probably fall apart at some point. And it might even cause your company to fall apart too!
So what can you do about this?
Well, if I were building a SaaS startup with another co-founder (or more), then I would:
Figure out at the very beginning of the relationship exactly how much each person will get and why.
Figure out whether there is an argument for getting more or less than 50% of the initial equity split. And if there is an argument for getting more or less, then figure out how to compensate one person over the other fairly.
And if you do this, then I think you will be much more likely to have a successful relationship with your co-founder(s) throughout your company’s lifetime.
Because instead of struggling to figure out how to resolve disputes over equity in a fairway after they have already happened, you will be doing it before they happen.
And that will give you a much better chance of building a successful SaaS company.