Be careful! The vast majority of founders and those who advise founders attempt to solve this problem with fundamentally flawed logic. The primary mistake is basing the equity split on unknowable, future events such as a founder's expected commitment to the company or the creation of future value.

There is, however, a way to get this right every time.

Startups are unique in that they don't pay for inputs that more established companies are expected to pay for such as salaries and expenses. The amount that most companies are expected to pay is known as the fair market value.

If the company does not pay, the unpaid amount is essentially a bet on the future value of the company. It's impossible to determine the future value of any company, but it's easy to observe the fair market value of the bets.

For two years you have placed bets equal to the unpaid portion of your fair market salary and any expenses covered by your personal or investment dollars.

The new guy will join you and he, too, will place bets in the form of unpaid compensation, etc.

The betting will continue until the company has enough money to start paying at breakeven or Series A investment. When this happens, you can calculate each persons bet relative to every other person.

A person's share of the equity, therefore, should be based on that person's bet. This is literally the only logical way to divide up equity.

This is the basis of the Slicing Pie model for equity splits. It's the only equity model based on observable facts and it is used by startups all over the world.

You can learn all about it at www.SlicingPie.com or by setting up a call with me here on Clarity.fm. As of this writing, I've done almost 800 calls on exactly this topic with hundreds of 5-star reviews.

There are lots of ways to split equity, but only one way that makes it fair.