🍰 4-Step Cofounder Equity Split Model

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Hi there - it’s Egemen 👋 Thanks for reading Scalable.

This week’s edition doubles down on determining equity splits, there is a free framework to help you with it.

I have (unfortunately) witnessed successful startups disbanding, purely due to lack of transparency in equity splits among the cofounders.

👉 Take this one piece of advice with you: Whenever you discuss and reach some sort of consensus with your cofounders, make sure you write it down where all of you can see it on the same day.

Here’s a snapshot of what’s on the menu today:

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☝️ Scaled this past week: 44.01

44.01 aims to eliminate CO2 by turning it into rock, providing a safe, permanent, and scalable solution for carbon sequestration to help protect and repair the climate.

They just secured wrapped up their Series A - it’s the scale of the week!

Here’s what they do:

• Accelerating the natural process of CO2 mineralization to permanently remove captured CO2 in less than twelve months.

• Their tech provides a globally applicable, safe, and modular solution for effective carbon sequestration.

🪨 🪨 44.01 rocks! (- had to do it)

🧠 Deep-dive: Slicing Pie and Cofounder Relations

Equity splitting can easily become a contentious issue in startups.

Founders often ask how they should split equity with their co-founders. Traditional static models often lead to disputes, as they don't account for changing contributions over time.

Someone who I worked with in the past (who I now consider a mentor and a friend) first mentioned the Slicing Pie model a couple months ago, addresses this issue quite well.

The purpose of this approach is to reflect real contributions and reduce conflicts among team members on the go.

Slicing Pie is a dynamic equity allocation model.

• Unlike fixed equity splits, Slicing Pie adjusts shares based on contributions, such as time, money, ideas, and other resources.

  • The model tracks inputs and calculate equity accordingly.

• If a member leaves or new contributors join, the equity pool adjusts.

  • This eliminates the resentment often associated with static splits.

• To implement Slicing Pie, you’ll need to keep detailed records of all contributions by using multipliers to value different types of inputs.

There is a free trial on their website, and their online Pie Slicer application captures the contributions made by each team member and calculates each person's share in real-time.

This video is pretty cool - explains how it works:

For instance, cash contributions might have a higher multiplier compared to time, reflecting their impact on the startup's survival.

• In this example, Alice owns 80% of the company (40/50), and Bob owns 20% (10/50).

• See how Alice “did not spend any time”, but Bob put 100 hours into it.

• In this case, cash had a multiplier of 4, where are working effort was 2 - only half of it, which should mutually agreed upon.

More on this in the 🗺️ Method section.

👉 On cofounder relations, if you are scared of what will happen if you end up parting way with a co-founder, make sure you have a proper vesting schedule.

A part of my week consists of doing a lot of research in the form of reading, talking to people, and sometimes watching YouTube videos.

I have come across these 2 gems while I was working on this framework:

The Michael Seibel one is more of a general mindset to adhere to, but the Harj Taggar one is a bit longer, and deserves a better attention span there.

🗺️ Method: 4-Step Cofounder Equity Split Model

Well, I took the liberty to summarize and formulate an example around the Slicing Pie model and created a free guide for it.

This model will help you allocate equity based on each founder's actual contributions (tangible and intangible) to ensure a transparent distribution.

On a high-level:

• Contributions (cash, time, ideas, etc.) are valued and adjusted using risk multipliers to reflect their true impact.

• The adjusted values are summed to determine the total contribution, and equity is allocated proportionally based on each founder's %.

I hope it comes in handy - all yours.

⚾️ Catch: OpenAI Launches GPT-4o Mini

To none of our surprise, yet another AI new is the catch of the week.

OpenAI announced their new model GPT-4o Mini, which is not going to affect users on a day-to-day basis but will open the door for mainstream AI adoption.

• A cost-efficient small AI model, aimed at making its technology more affordable and less energy-intensive.

• Priced at 15 cents per million input tokens and 60 cents per million output tokens, the GPT-4o mini is more than 60% cheaper than GPT-3.5 Turbo.

This will allow OpenAI to serve more clients without having to invest in heavier hardware, and should speed things up for consumer-level AI adoption.

🚀 AGI is around the corner. What a time to be a startup founder.

👋 Working on a startup? Here’s how I can help:

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