Hire Employees. Not Partners.
If you give away equity, make sure you do it the right way.
Dear Jeanie,
I want to talk to you about one of the most consequential decisions you will ever make if you start your own business. Whether to bring in a partner and give away a piece of what you are building, or to hire employees and keep full ownership of your company yourself. Because the difference between those two paths is not just financial. It is the difference between being the sole decision maker of something you built and spending the rest of your professional life negotiating every major decision with someone who owns half of everything you created.
My strong and honest advice is this. If you can possibly avoid taking on a business partner, do it. Build it yourself. Hire people to fill the gaps in your skills. Pay them a salary. Give them performance bonuses. Offer them competitive compensation that keeps them motivated and loyal. Use vendors and outside contractors for the functions you cannot handle internally. But do not give away equity in your company unless you have absolutely exhausted every other option available to you. Equity is ownership. And ownership, once given away, is extraordinarily difficult and expensive to take back.
Here is the most practical and most overlooked reason why employees are almost always preferable to partners. If an employee is not working out, you can let them go. It is never easy and it should always be handled with professionalism and respect. But it is clean, legally straightforward, and final. You part ways, pay whatever severance is appropriate, and move forward. The business continues without significant disruption and without any ongoing financial entanglement with the person who is leaving.
With a partner it is an entirely different situation. You cannot simply fire a partner. They own a piece of your company and that ownership does not disappear because the relationship has deteriorated or the partnership is no longer working. To remove a partner you essentially need to buy back their shares, which means negotiating a price for their equity at a valuation that often feels painful given the circumstances, going through a formal legal process that can take months and cost significant amounts in attorney fees, and potentially dealing with someone who is motivated to value their shares as high as possible precisely because the relationship has broken down and goodwill is gone. It is expensive, emotionally draining, and almost always avoidable with better decisions made at the beginning.
The same logic applies to vendors and outside contractors. If you can hire someone to perform a function rather than bringing in a partner to own that function, do it. Pay them for their work. And when the engagement is complete or no longer serving the business, end it cleanly and move on. No equity negotiation. No buyback process. No legal battle over valuation.
The fundamental principle is straightforward. The less control and ownership you give away, the more options you retain. Every percentage of equity you hand to someone else is a percentage of every future decision, every future dollar of profit, and every future exit or sale of the business that now belongs to someone other than you. Give away only what you genuinely cannot avoid giving away. And before you give away anything at all, ask yourself honestly whether an employee, a vendor, or a contractor could do the same job without requiring an ownership stake in return.
That said, this is not a one size fits all answer. There are absolutely situations where a genuine partnership is the right structure. Where the business truly cannot exist without two people who are equally essential to its success. Where the commitment and alignment you need from someone simply cannot be created through a salary alone. Where the risk and sacrifice being asked of the other person genuinely justifies giving them ownership rather than just compensation. These situations are real. The decision always comes down to the specific circumstances, the specific people involved, and the specific nature of what you are building together.
But the default position, the starting assumption before any specific circumstances change the calculation, should always be to hire rather than partner, to compensate rather than share ownership, and to keep as much control as possible in your own hands for as long as possible. Because control is options. And options, as I have told you in every letter I have ever written, are everything.
A business partnership is in many ways more legally and financially complicated than a marriage. When a marriage ends there is an established legal framework designed to help two people separate their lives and assets in a relatively orderly way. When a business partnership falls apart, which happens far more often than most optimistic founders ever anticipate, there is no equivalent framework waiting to help you. What there is instead is lawyers, arbitration, potential litigation, and a company that grinds to a halt while the two of you fight over who owns what. I have watched this happen to people I know and respect. It is expensive, emotionally exhausting, and almost always avoidable.
If you find yourself in a situation where a partnership is genuinely the right structure, here is exactly what you need to know to protect yourself.
Start With the Equity Split and Get It Right
The starting point for most equal partnerships should be a fifty-fifty split. I know that might feel uncomfortable, particularly if you are the one who came up with the idea. But here is the honest truth about business ideas. An idea alone is worth almost nothing without execution. If you need a partner because they have skills or resources you genuinely cannot replace or easily hire, then they are contributing something just as valuable as the idea itself. A fifty-fifty split in that scenario is not generous. It is accurate.
The calculation can and should shift if one partner brings something tangible and measurable to the table before the partnership formally begins. If you already have revenue, paying customers, outside funding, or significant market traction before your partner joins, that existing value was created entirely by you and justifies a different split. Similarly if one partner is contributing significant capital to fund early operations, that financial contribution has real value the equity split should reflect. But if you are both starting from zero on the same day with roughly equivalent contributions, start at fifty-fifty and negotiate from there based on specific and concrete factors rather than whose idea it originally was.
Vesting Is Not Optional. It Is Essential.
Every equity agreement between co-founders needs a vesting schedule. Without one, you are exposed to one of the most common and most damaging scenarios in early stage business. Your partner leaves 9 months in for any reason and walks away with whatever percentage of the company you agreed to give them on day one, despite having contributed for only a fraction of the time. Vesting is the mechanism that prevents that from happening and it is non-negotiable in any serious co-founder agreement.
The industry standard vesting schedule for co-founders is a four-year vesting period with a one-year cliff. Here is what that means in plain and practical terms.
Imagine you and your partner each own 50% of the company represented by 100,000 shares each. A four-year vesting schedule means those 100,000 shares are earned gradually over 48 months of active contribution rather than granted all at once on day one. Divided across 48 months, each of you earns approximately 2,083 shares per month.
Here is where the one-year cliff comes in. For the first 12 months no shares transfer to either of you. They are accumulating on paper but have not been formally granted yet. If either partner leaves before that 12-month anniversary, they leave with absolutely nothing. Zero shares. Zero equity. The cliff exists to protect the remaining partner from someone who joins enthusiastically, contributes for a few months, decides startup life is not for them, and walks away with a meaningful ownership stake in something they barely helped build.
On the 12-month anniversary the cliff is reached and all accumulated shares vest at once in a single grant. In our example that is 25,000 shares each, exactly 25% of the total allocation. From that point forward vesting continues monthly at approximately 2,083 shares per month until the full four-year schedule is complete.
Here is a concrete example of how this plays out. If your partner leaves at month 18 they have passed the cliff, so they keep the 25,000 shares from the cliff grant plus approximately 12,500 shares from the 6 months of post-cliff monthly vesting, for a total of roughly 37,500 shares out of their original 100,000 share allocation, which represents approximately 18.75% of their total equity. The remaining 62,500 unvested shares, representing 31.25% of their original allocation, return to the company. The departing partner is compensated fairly for what they actually contributed and you are protected from carrying someone who owns a significant piece of the business without doing any of the ongoing work.
If your partner leaves at month 8, before the cliff, they walk away with zero shares regardless of how hard they worked. This feels harsh in the moment but it is essential protection during the period when most people discover that startup life is not what they expected.
One final and important point. The vesting schedule applies equally to both founders. Your own equity vests on the same schedule, which means if you leave before your vesting is complete you only take what has vested up to that point. This symmetry is intentional. It means neither partner has a structural advantage over the other and the agreement protects both of you equally.
One Critical Tax Step That Most People Miss
If you are building a company in the United States and receiving equity that vests over time, there is a tax filing you must make within thirty days of receiving your equity grant. It is called an 83b election and it is one of the most important and most commonly overlooked steps in the early life of any business.
Without an 83b election, you will owe taxes on your equity every time a portion of it vests, based on the value of the company at that time. If your company grows significantly in value before your equity fully vests, you could face a very large and very unexpected tax bill on paper gains you have not actually converted into real money. With an 83b election, you pay taxes on the value of your equity at the time of the grant, which in the very early days of a company is typically very low or even zero. You can find free templates for the 83b election online. But the thirty day deadline is absolute and unforgiving. Miss it and you cannot go back.
Salaries Matter as Much as Equity
Here is something that most first time co-founders get dangerously wrong. They agree on the equity split and start building without ever having a clear and specific conversation about how each partner is going to pay their bills while the business is in its early stage and not yet generating meaningful revenue.
This oversight creates resentment faster than almost anything else in an early business relationship. One partner has savings and can sustain themselves comfortably for twelve months without income. The other is burning through their last few thousand dollars and feeling desperate pressure to generate revenue immediately, even if that is not the right strategic priority for the business at this stage. Those two people are not operating with the same mindset or the same time horizon, and that misalignment will eventually create serious conflict if it is not addressed directly and honestly at the beginning.
The solution is to define a founder salary that both partners agree to pay themselves from the company’s funds, in equal amounts, as soon as the company has money to do so. It needs to be realistic for the city and context you are operating in, meaning enough to cover genuine living expenses without being so high that it drains resources the company needs for growth. It does not need to be impressive. It needs to be livable and equal.
If one partner has significantly more personal financial resources than the other, the solution is not for the wealthier partner to forgo their salary to help conserve cash. That approach feels generous in the moment and creates deep resentment later. A better approach is for the partner with additional resources to invest that money formally into the company as capital in exchange for fair additional equity compensation. Both partners then draw equal salaries. The financial contribution of the wealthier partner is recognized through equity rather than creating an invisible and unacknowledged sacrifice that accumulates as emotional debt between the two of you.
Define these terms clearly. Write them down. Both of you sign the document.
A Partnership Is Like a Marriage. Treat It That Way.
You need to be able to have completely honest and sometimes uncomfortable conversations with this person before things go wrong, not after. You need to be aligned on values, on risk tolerance, on what success looks like, and on what each of you is willing to sacrifice to get there. You need to know how this person handles pressure, conflict, financial stress, and failure, because all of those things will come, and who they are in those moments is who you are actually in business with.
Choose carefully. Structure it properly. Put everything in writing. And if at any point during the process of setting up the partnership you find yourself reluctant to have the honest conversations because you are afraid it will make things awkward or damage the relationship, that reluctance is itself important information about whether you are truly ready to be in business with this person.
A good partner will welcome those conversations. A good partner will understand that clarity now prevents conflict later. And a good partner will sign the agreement with the same relief and confidence that you feel, because they know that the structure protects both of you equally and gives the business the best possible foundation to succeed.
But if you can build it without giving away ownership, build it that way. Hire great people. Pay them well. Use vendors and contractors for what you need. Keep the equity. And build something that is entirely and completely yours.
Love, Dad.