This article is for startup founders who are dividing equity among co-founders and need to get the split right from the start.
If you're wondering how to fairly allocate ownership, whether equal splits actually work, or what investors expect to see in your cap table, this guide covers common equity split approaches, how to evaluate each founder's contribution, and why vesting schedules are essential for every founding team.
Key Takeaways
• All founder equity must vest over four years with a one-year cliff to protect against early departures. • Equal splits rarely reflect actual contributions and create resentment when founders contribute unequally over time. • Investors view equal splits with no clear leadership and missing vesting schedules as major red flags. • Calculate financial investments separately from sweat equity to maintain clarity about what compensates cash versus work. • Document your equity split rationale and founder expectations in a founders' agreement before value accumulates.
Equal splits rarely work well because they don't reflect actual contributions over time. One founder may work full-time while another stays part-time, or one may bring critical technical skills while others contribute less specialized abilities. These differences create resentment when everyone owns identical stakes despite unequal effort.
Do founder equity splits need vesting schedules?
Yes, all founder equity should vest over time, typically over four years with a one-year cliff. Vesting protects the company when founders leave early by ensuring departed founders don't keep full equity stakes despite minimal contribution. Even perfectly fair initial splits need vesting because circumstances change.
How do I value different founder contributions fairly?
Consider four key factors: time commitment (full-time vs. part-time), skills and expertise (rare vs. easily replaceable), financial investment (personal capital contributed), and opportunity cost (salary or opportunities given up). Calculate financial investments separately from sweat equity, then split the remaining equity based on expected contributions.
What happens to my equity percentage when we raise investment?
Your ownership percentage decreases proportionally as new shares are issued to investors. If founders collectively own 90% before investment and grant 20% to investors, each founder's stake reduces by approximately 22%. A founder with 30% pre-investment would own approximately 24% post-investment.
Can we change our equity split after we've already divided it?
Yes, but it requires all affected shareholders to agree, making it extremely difficult once the company has accumulated value. Major contribution shifts, full-time transitions, or founder departures might justify reconsidering splits. Approach renegotiations transparently with objective data rather than emotional arguments about fairness.
What equity red flags do investors look for?
Investors worry about equal splits with no clear leadership, no vesting schedules, unusual allocations with no documented rationale, recent major changes suggesting instability, and excessive advisor equity. They prefer seeing clear leadership through majority ownership, comprehensive vesting, and rational allocation reflecting obvious contribution differences.
Should we use a founder-employee hybrid structure for early team members?
This structure works when some team members join after initial formation but before the company has meaningful value. Founding team members typically receive 60-90% collectively while early employees receive 1-5% individually. The key is implementing this early before anyone feels they're being retroactively downgraded from founder to employee.
What should our founders' agreement include?
Your agreement should document equity allocation details and reasoning, decision-making authority (what requires unanimous vs. majority approval), founder roles and responsibilities, and exit and buyout provisions. Clear documentation prevents future disputes and shows investors you've made thoughtful decisions about your structure.
How do we handle founder equity if we're in different countries?
International founder arrangements require considering tax implications in each founder's jurisdiction, withholding obligations the company may have, and transfer restrictions across borders. For Irish companies with non-resident founders, consult with tax advisors in each relevant jurisdiction before finalizing equity arrangements to avoid unexpected tax consequences.
