Should I offer cash or equity to a new cofounder?

One of the first big questions that many startup founders face is deciding what to offer a potential cofounder as compensation — cash, equity, or some mixture of both. This decision sets the tone for the entire relationship and can have long-lasting impacts on the success of your startup. While this might seem like a straightforward choice, it’s anything but. Let’s break it down.

Cash: simplicity, but at a cost

If you’re worried about conserving your equity for the future and not yet ready to enter into a longer term relationship with a new cofounder, offering a cash-only deal to a potential cofounder can be appealing. It’s direct, clean, and doesn’t complicate the cap table. There’s no ambiguity around ownership, no dilution down the road, and you avoid the tricky conversation of ‘how much equity is enough’.

Paying a cofounder in cash, however, comes with significant trade-offs. First, your startup might not have the cash balance or income to afford it. Even if you do, using cash to compensate someone in the early days of a venture can signal that this isn’t a long-term commitment. You’re hiring them for a job, not forging a partnership.

Beyond that, offering cash can limit the cofounder’s motivation. In many cases, the prospect of owning a piece of the company drives people to work harder and take on more risks. If they’re not personally invested in the success of the startup, will they give it everything they’ve got? Do you really need them to?

Equity: the shared destiny approach

Equity is often a better alternative. By offering a cofounder equity, you’re not just handing over a salary; you’re handing over a piece of the dream. You’re saying, “We’re in this together.” For the right person joining the right startup, this fosters long-term commitment and aligns both your incentives, especially if the cofounder is expected to put in significant sweat equity and commit for the long haul.

But it’s not all roses. Equity can be hard to value, especially in the early days when your startup is pre-revenue or pre-product-market fit. How much is too much? How do you ensure the distribution is fair? There are no binary answers to these two questions — what’s fair and what’s too little/too much is always going to be relative, and if it takes too much negotiation to find a middle ground, one or both of you may have lingering doubts that can do the opposite of what you intended and make you competitors instead of a united team. And what happens if things don’t work out? These are all real considerations that can complicate the decision.

Equity also dilutes your own stake in the company. In the early stages, that might not feel like a big deal, but down the road — when you’re raising capital or considering an exit — maybe you’ll be thankful for every percentage point of ownership you’ve kept.

The hybrid model: some cash, some equity

In most cases, offering a mix of cash and equity is the best approach. This way, you provide immediate compensation while also incentivising your cofounder to stick around and grow the business. A hybrid model can be particularly useful if your cofounder has immediate financial needs but also wants to be deeply invested in the future success of the startup.

The balance here is crucial: too much cash, and you risk losing the long-term motivation that equity provides. Too much equity, and you may feel like you’ve given away too much of your company early on.

What’s the right call?

Ultimately, the decision between cash and equity depends on your specific circumstances. If you’ve got the funds and want a clear transactional relationship, cash might work. But if you’re looking for a partner who is equally invested in the success of the venture, equity — or a combination of the two — is likely the better path.

The question is not just about compensation. It’s about the message you’re sending. Cash says “I need you now.” Equity says “I want you with me for the journey.”

So, what are you really looking for in a cofounder? The answer to that will guide your decision.

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