Context & disclaimers
I’m Anna, the CEO/co-founder of Korion Health and the winner of the $1M 2024 Hult Prize. I’ve been working on my company since 2021, when I conceptualized it at a hackathon with some friends. Since then, we’ve been through the full gamut of co-founders that didn’t work out, students bailing in and bailing out as career priorities shifted, and just… a whole heck of a lot of uncertainty, which is pretty normal.
Something I’ve struggled with is giving the right amount of equity in exchange for others investing in my idea. For other startup founders, maybe it’s reluctance to give up equity that will cause you to lose out on a great team member. I also tend to be a bit more of an experiential learner: instead of reading the manual, I just start building and trust that I can fix any issues as they come up, which has its pros and cons. In any case, we all come into this process with biases, and if this is your first time starting a company (as it was for me), it’s going to be a learning process. It’s more important to find people that are willing to learn/grow with you and change their beliefs in the face of new information than it is to find people that agree with you completely off the bat.
There are a lot of things I wish someone had told me back when I started, and I’m writing this post with the hope of helping other first-time founders come up with a framework that works for them. I hope I have written this blog post broadly enough that it is applicable for any first-time founders dealing with uncertainty in terms of team contribution. I am assuming that you are starting with zero capital, the way I did, so cash compensation isn’t an option.
That being said, keep in mind that I have founded only one startup (n = 1, can’t claim statistical significance), all opinions are my own, and I am not a lawyer, etc. Ok, let’s get on with it. :)
Lesson 1. Choosing a husband/wife/life partner – ahem, I mean startup co-founder(s)
But how different is it, really? Like any marriage, a co-founder partnership will need to weather challenge after challenge, difficult decisions, and a fast pace when needed. While disagreement is healthy and promotes growth, you need to be able to eventually make a decision. I would generally not recommend locking in on the first person you ever date, no matter how excited you are that someone finally found you attractive. Yeah, it’s not like I fell head over heels for the first guy that asked me out or anything… ahem, lesson learned.
Green flags:
Vibes – The below list helps discretize some personality traits to look for in a co-founder, but I think the most important is whether you two get along and can grow together
Similar enough to share the same values, but different enough to look out for each other’s weaknesses and amplify each other’s strengths
Cheering each other on
Humility – Asking questions and bringing their own experience to the table, but also being aware of their limitations and open to other ideas
Flexibility & courage – Willing to try new tasks even if they aren’t part of their typical skill set
Taking initiative
When problems arise, they ask questions and approach with curiosity and a solution-oriented mindset, rather than pointing fingers. They focus on the method that led to the result, rather than just the result
Red flags:
Advocating only for themselves
Confidently saying things that they cannot back up with evidence (confidence ≠ competence)
“Selling” themselves and their ability, despite not having industry experience
Overnegotiating – It’s great to try and optimize for different factors, but at a certain point, if optimizing is preventing progress, we have a problem
My co-founder, Akshaya, was not my first co-founder, who didn’t end up working out – but she is the one who stuck around, learned how to solve problems, took initiative, and who was ultimately willing to grow with me. “Co-founder” is often a role that people grow into. Like any relationship, it’s less important whether you’re a perfect fit to begin with, and more important whether you share the same long-term vision and are able to listen to each other and work through problems together. A lot of people ask me how to find a co-founder, and I’ll say it’s not an easy process, but what has worked well for me is finding a “friend of a friend”. Akshaya and I were introduced via a mutual friend who knew us both well, and that way you have some “vetting” of them over time by a trusted person, but also don’t have the risk of damaging a preexisting friendship dynamic.
Note: How to handle the student who “wants to be involved” but is noncommittal, uncertain, or of unknown competency… isn’t quite a co-founder but also isn’t quite a stray cat… Do not offer them any equity. Establish milestones and feel out their commitment and fit over time. I would set the expectation early that noncommittal students are classified as volunteers and stick to it. Here is a volunteer contract that Korion used in the early days for your reference and/or use if you’d like; hopefully this makes your life easier. It was provided to us free-of-cost by a kind corporate attorney, who was also the dad of one of the students on our team. Note that for-profit companies typically cannot have volunteers the way nonprofits can, unless they are: (a) also a student and a case can be made for them to derive primarily educational benefit from their involvement or (b) getting class credit, which most students typically are. They could also secure external funding through a fellowship or something similar. At the University of Pittsburgh, we have the honors program fellowships that provide funding for interested undergraduates to intern with us. If the volunteer later has more clarity on career interests and you mutually decide that it’s a good fit, you can always decide on a level of equity and backdate it, but just remember that it’s always easier to give more equity later than to take it away!
Lesson 2. Establish expectations for everyone
There is a media bias toward unicorn startups that become wildly successful, and it’s easy to get caught up in the “potential” of the company. Stop. Recognize that you are just as susceptible as anyone else to the psychological and media bias of latching onto potential rather than actually thinking about statistics. The success rate is something more like 0.0001% for startups, depending on how broadly you define “startup.” Most of them will fail. It’s not quite a lottery ticket, because you actually do have a lot of control over the odds of success, but there are still many things outside of your control. Even if you do succeed, you will probably not make a salary for a few years, because it takes a while for most startups to generate revenue. Maybe it’s the Asian immigrant in me talking, but I would almost never recommend cutting loose a safety net to pursue a startup, unless you absolutely cannot live with yourself until you pursue your startup – as was the case for me when I was watching my patients die of preventable conditions. In the real world, you need to eat and pay for other costs of living. So just be careful about how much you let adrenaline rule your life.
A good analogy that helped me was to envision the startup as a baby that you are parenting. Ideally, you’re somewhat financially stable, or young enough to take on the risk and effort. It is a long-term commitment, probably lasting several years if you want to really build up a company. And the vast majority of companies do not succeed through minuscule efforts of a large number of people: they succeed due to a few (perhaps two or three) aligned and complementary founders fully committed to raising the baby. I mean, company. It can be tempting to offer equity to everyone involved, especially if you’re at an early stage and don’t have any funding, but try to resist, because this can really hurt your company later on. Equity owned by people who no longer contribute is considered dead, and you do not want dead equity!
As an edge case, let’s say 90% of a company is owned by people who no longer contribute. The remaining 10% might not be incentivized to continue working on the company if they are not being fairly compensated. This is no bueno. Investors know this, and it will be a big red flag to them when looking at your company, hindering your ability to raise funds in the future. Equity is not a party favor. It is a deep, potentially multi-year commitment.
Lesson 3. It’s important right now to find something that everyone agrees with, but sometimes that won’t be what’s objectively fair, because different people value themselves differently. It’s more important to find something that is fair long-term.
I’ll admit, I have a bit of a rose-colored glasses perspective on the world. I believe that wealth isn’t in money – it’s in people and in seeing those you care about happy and healthy. I believe in investing in people, and that if you take care of others, they will take care of you too. But some people out there haven’t had the privilege of growing up in a relatively stable household or being surrounded by kind people. Some may have been exploited before or taught through experience that the only ones looking out for them are themselves. Sometimes this manifests as them being highly risk averse and wanting everything written down in some form of a contract. Sometimes this manifests as them trying to exploit you first under the assumption that you may try to exploit them later.
We all come into the conversation with different lived experiences, worldviews, goals, and motivations. Do not assume that everyone thinks about the world the same way you do, no matter how great initial vibes are. It’s great to trust but naïve to do so blindly. As the team leader, it’s your job to understand what success looks like to the individual and figure out how to meet them where they are, or learn to be ok with cutting them loose.
Lesson 4. Bring in an advisor (or two) to guide the conversation
When you are the team lead, especially if you don’t have much startup experience, it can be awkward to lead the equity conversation. First off, if you are making the decisions, it can feel like a “you vs. your teammates” situation, which you don’t want. Second, let’s face it, you don’t know what you’re doing, and while perhaps the company was your idea and you’re great at building (or whatever it is you do), you might not be the best person to decide what a fair equity split is.
Universities and startup incubators often have entrepreneurs-in-residence who are free mentors you can bring in to provide advising. I would highly recommend bringing in one or even two of these folks to mediate the conversation with the team. A good mentor brings not only experience, but objectivity and structure to the conversation, and they can better navigate the internal strife and tension that come from assigning value to each other. When choosing an advisor, pick someone who has experience founding their own company (the more recent, the better, as things can change through the years) and has experience working with people specifically in your shoes (e.g. student companies with multiple people on the team starting out). I would recommend vetting 2–3 people.
Once you have chosen a mentor, there are two ways to get an initial draft of the equity split. Option 1 – As the team lead, have a one-on-one conversation with your mentor about your perspective on what everyone has done (making clear that your perspective is intrinsically subjective and limited), and work with them on a “rough draft” equity split that seems reasonable before presenting it to the larger team. Option 2 – If your mentor is willing, set up a time where team members each get some time to chat with them about their own perspectives of value they bring. (And if time allows, their perspectives on what others bring. This can also be a soft skills test because for startups to succeed, it’s critical that everyone appreciates each other’s unique talents and skills rather than just pumping themselves up. In fact, I see not advocating for others on the team to be somewhat of a red flag.) Your mentor can then help you draft something for discussion.
Lesson 5. Deciding on the actual split and other logistics
Here is a pill that was tough to swallow for some members of the team when Korion started out: Equity, when done most effectively, should be based on the value one brings to the company and what milestones one reaches that move the company forward in a tangible way. It is not based on effort and time spent if that effort doesn’t go anywhere. Anyone advocating for themselves or others to receive equity (and I do think advocating for others is a great green flag) should be able to articulate specific ways that the person delivers consistent value. If you aren’t sure what “value” is, ask a mentor.
That being said, there are several decent heuristics that can provide a frame of reference out there:
The Founder’s Pie – Tl;dr, this involves assigning weights to teammates’ domain expertise, time put in, sacrifices made, etc.
Estimating based on financial value – I’m not sure this is an official practice per se, but one of our advisors suggested it. Basically, assign a potential cash value to everyone’s contributions (given their level of experience) and then divide up equity relative to that.
Using data from sources like Carta (or if you have an HR resource, they may be able to look up some stats) – It can be helpful for getting a ballpark estimate, but roles are so fluid early in the game that I would not recommend this method until later on when you’re actually hiring your first employee.
You can even use a couple different methods and see how they shake out compared to each other, as we often do in science (obligatory plug for the scientific method, since I’m still doing my PhD). There is something to be said for leveraging wisdom of the crowds and asking several different (unbiased; i.e. do not tell them what other advisors told you before getting their thoughts) advisors for their thoughts as a heuristic to help you find the “real” truth.
As you discuss, you will inevitably need to start making some assumptions. Sally is coding full-time over the summer but not sure how busy she will be in the fall when classes start again. Jon says he can juggle startup responsibilities plus all his extracurricular activities when classes start (but can he really?) and is in it for the long-haul (but is he really?). Leah has no idea what her commitment level will be but has been absolutely killing it at the design work she does.
There are many resources and frameworks out there. When in doubt, follow best practices, but acknowledge that individual situations might call for flexibility (within reason). Your final cap table should be both accurate and appropriately motivating for each team member, as well as compelling and sensible to investors (if you are seeking investment… Power to you if you are bootstrapping).
Note: When incorporating your company, I would recommend authorizing 10 million shares and then issuing 5 million of them for founder equity. You’ll want the additional shares later for your employee options pool and other uses. The percentage equity is always calculated using the number of issued shares as the denominator, not the authorized shares.
Lesson 6. When to decide: Start the conversation early to CYA, then punt
Keep in mind: as founders (in the United States), you will likely fill out 83b elections for the IRS. This essentially allows you to pay taxes on the current value of your equity (i.e. $0) as opposed to the later value (hopefully a lot more than $0), and the elections must be filed within 30 days of being issued equity. Of course, the tax benefit is contingent on the current value of your equity being low. That means that once your company is incorporated and you start making progress, you are on a ticking clock to issue equity and file 83b’s. In the most ideal case, you would incorporate the company, issue equity, and file 83b’s on the same day. But while this avoids tax risk, doing everything so quickly can increase the risk that you’re making the wrong decision as far as your founding team is concerned.
You can punt on the company incorporation, but some pitch competitions or investors require a legal incorporation. You also want your team members to proactively assign their company-related intellectual property to the company rather than to themselves, which can otherwise cause big problems later on. Remember when I said that all early-stage team members are volunteers if there is any uncertainty about their commitment? The one exception to this would probably be those who contribute significantly to the intellectual property (if you have any), as you absolutely need them to assign their IP rights to the company. I think that would also fall into the category of creating tangible value for the company, which is another qualifier for equity.
Keep in mind the importance of demonstrated competency rather than promised competency. Someone pledging to do something doesn’t mean they are actually able to do it. On the flip side, someone saying they can’t do something doesn’t mean they won’t eventually rise to the occasion and knock it out of the park. (The Korion team is mostly like the latter. We constantly surprise ourselves.) In fact, students and first-time founders are often dumb as rocks. (It’s ok, I was too.) Try to set some reasonable expectations for everyone and have frequent team check-ins to reassess how things are going and whether you are still aligned.
So we have this tricky balance. Incorporate once you need to. (And don’t pay more than $5k for it. If a lawyer tries to charge you more, you’re getting ripped off.) Then I wouldn’t wait more than a year after incorporation to finalize your founder cap table, issue equity, and file 83b elections. The tough thing is, the earlier you do this, the better for task risk, but the later you do this, the better for team risk. If you do end up deciding you want to wait more than a year to finalize your cap table, you may need to get an independent 409A valuation (an official valuation by an objective third party for tax purposes - NOT the same thing as a valuation cap on a SAFE note, which is often a somewhat arbitrary number) for your 83b elections. You can get these from cap table management groups like Carta, Pulley, or JP Morgan Cap Table Management. For the record, we used JP Morgan after extensively investigating Carta and Pulley because JPM was the most affordable (free for up to 100 stakeholders) and had free setup support – but you will find the one you prefer for your team. I would budget $2–3k for a 409A valuation for a pre-revenue startup. This can be hefty for students, but I think it is well worth it for the possibility of saving a ton of money on taxes if your startup becomes profitable.
Lesson 7. Restricted Stock Agreements (RSAs) are a classic, but there are plenty of other creative options for those who don’t fit the mold. Turns out you can put almost anything into a contract??
Traditionally, founders get a 4-year vesting schedule with a 1-year cliff on their equity. But what if some people are full-time (hence the 1-year cliff is more meaningful), whereas others are “involved” for years but don’t do anything besides showing up to meetings sometimes? Is the cliff still fair? Or let’s say you have ~10 people on the team (most founding teams are 2–4 people) and are concerned about the long-term sustainability of everyone’s work promises or about raising a red flag to investors. Or maybe someone made critical contributions but has now moved on, and you want to compensate them (or they are demanding retroactive compensation – it happens) but don’t want to have dead equity on your cap table because it can hurt investment.
In those cases, you may want to consider:
Phantom equity. We did not end up going this route, so I will defer to a lawyer for specifics or tax implications, but the general idea here is that there is more of a handshake agreement. Someone holds equity but doesn’t get it until the company liquidates, and their equity doesn’t actually show up on the cap table.
Debt. There are lots of ways to structure this, but an example could be something like, “Track your hours and submit them for approval each month, and we will repay you at some rate like $25/h once we become revenue-positive and have a runway of greater than two years.” You could add a cap to the number of hours or something like that. The worker would need to be able to float on other revenue sources or savings until then. You would also need to be very clear (in writing) that this is still risky, because it’s possible that the revenue-positive stage is never reached. I’ve often struggled with letting people take on risk for Korion, but ultimately, people are adults and it’s important to me to give them the autonomy to make the decisions they see as being the best fit for their lives.
Task-based vesting milestones, rather than the 4-year schedule. You could also consider other time-based vesting. For example, a 1-year cliff for the full-time employee but a 3-year cliff for the part-time student may end up being roughly the same amount of overall time spent on the company for their cliffs.
While it’s generally best practice to stick to the traditional strategies and avoid red or orange flags for investors, you can certainly let yourself get creative, and a good investor will hear you out so long as you can articulate your logic in a way that makes sense.
Lesson 8. Some options if you have some cash
If you are lucky enough to have some cash, you may want to consider offering that as part of your compensation package. I would recommend using or finding a friend with access to the Carta Total Compensation dataset. It’s a great tool that shows data on 25th, 50th, and 75th percentile market rates for both cash salary and equity for any job position, based on where you are based geographically and what stage your company is in. It can serve as a great grounding point if your team doesn’t have enough real-world experience to know their market value. Keep in mind, if you don’t have experience, you should probably expect to be paid closer to the 25th percentile rather than 75th, but this is ultimately up to you. Typically, you would think of equity and salary as an inverse correlation, so if you are in the 75th percentile for salary, then perhaps you are only in the 25th percentile for equity. Or maybe you’re in the 25th percentile for both if you’re really green. The key is to maintain fair standards for everyone based on their own contributions and experience.
Lesson 9. Establishing expectations for accountability early on
Have everyone track their hours and what they are spent on, and submit these every month for accountability, at least until you feel that you have settled into a reliable rhythm and feel good about the vibes. This may seem like a pain, but it can protect you later on if there is an employment dispute, as startups tend to be in a gray area for employment law, and minimum wage laws are based on an hourly rate.
Lesson 10. Getting employment insurance
Unfortunately, it’s not uncommon for student-founded startups to face lawsuits once they start hitting some success. Usually, it’s some entitled, early-stage team member who has a disproportionately high perception of the value of their own work. Sometimes it is legitimate. In either case, as aforementioned, students (and for that matter, many first-time startup founders) are often dumb as rocks, and as such will do dumb things. Having a signed volunteer agreement from everyone and establishing a good paper trail of expectations and agreement can be very helpful in CYA, but if you want to be even safer, I would recommend getting some form of employment insurance so legal fees don’t bankrupt you. A good insurance broker can help you with this, and if you need someone, just reach out and I’ll introduce you to ours.
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Ultimately, there is nothing like real-world experience to build your intuition and teach you the lessons you need to know. When in doubt, don’t be afraid to reach out to mentors for help! I’m also happy to help fellow founders. We have received so much help in getting to where we are today. If you want me to connect you to the people who solved these problems for me, I am happy to. In writing this article, it’s my hope that my own lessons learned can be helpful to you, but at a certain point, you gotta stop worrying about optimizing or de-risking everything and just do it! If you’re in the position of starting a company as a student, I wish you all the best. It takes a lot of courage to dive into something so completely unknown, and whether or not your company ends up succeeding, I’m proud of you for having enough conviction to take the risk and do something to try and make the world better.
Thanks for reading, and happy founding!
Anna
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