Recently, I attended an internal course led by the president of a publicly listed company. It was an unplanned trip — and it brought unexpected insights.
The content covered equity distribution, incentives, financing, and monetization. It even addressed how to evaluate founders, how to find co-founders, and practical guidance on being an effective number-two leader.
Unfortunately, the president’s identity is too sensitive — sharing it could potentially move the stock price. After consulting with him, we agreed to keep his identity concealed in order to share these ideas more freely.
Today I’m sharing the key points and traps of equity distribution from that course.
1. The Traps of Equity Distribution
Every founder starts a business aiming for success. Yet over 90% of startups end in failure — and the most common form that failure takes is the team falling apart.
The four-act progression from partnership to dissolution: from united in purpose, to sleeping in the same bed with different dreams, to fighting each other under the same roof, to mutual destruction.
The main reasons founding teams fall apart include: unreasonable equity distribution, power struggles among management, lack of trust, insufficient communication, misaligned views on business direction, personality clashes that prove impossible to reconcile, and unclear profit-sharing arrangements.
The most critical factor of all is unreasonable equity distribution.
Human nature cannot withstand prolonged testing — especially when partnering with people you already know. Never let social awkwardness stop you from having direct conversations about money and interests. The best approach is to establish equity rules upfront, and nail down control rights at the same time.
2. Factors That Influence Equity Distribution
In equity distribution, every critical factor revolves around the founder. First and foremost: the founder must be the actual controlling shareholder — especially in terms of decision-making authority. In a startup, the founder is the stabilizing anchor, the spiritual leader, and the ultimate holder of both rights and responsibilities. It should also be the founder who mediates the interests and authority within the founding team.
There are five main factors that influence equity distribution:
First: Business Model
Different business models assign different levels of importance to each partner.
- For platform-based, operations-heavy companies, the COO matters far more than the CTO or CFO.
- In technology-driven companies, the CTO is second only to the CEO.
- In companies that rely heavily on financing, the CFO is second only to the CEO.
Second: The Controlling Shareholder’s Philosophy and Life Pattern
Take the Control-Retaining type, for example — the hallmark is sharing profits but not power. This tends to attract short-term, profit-focused partners, while ambitious long-term talent may be put off.
The Open-Handed type is willing to share both power and profit, which draws in diverse talent. But managing the balance of authority and interests among team members is crucial — otherwise, internal friction is inevitable.
The Rooster type shares neither power nor profit. This attracts seasoned corporate survivors who are essentially just showing up for a paycheck. The founder’s own capability becomes the absolute ceiling of the company.
Third: Company Valuation Level
Who on the founding team is primarily responsible for the company’s current valuation — and who will drive its future valuation potential?
Fourth: Founding Team Composition
In the early startup phase, each team member can hold 3–5% equity, including restricted equity and options with clearly defined vesting rules.
Fifth: The Gap Between Current Salary and Market Rate
A person’s total compensation equals base salary plus performance bonus plus equity value. When the gap from market rate is too large, authority must be delegated downward — while vision and promises of future upside are used to hold things together.