Founder Equity Split FAQ

Co-founders should consider multiple factors when determining equity splits:

Past contributions:

• The original idea (though ideas alone are worth less than execution)
• Any work done before formal founding
• Intellectual property or patents contributed
• Seed capital invested

Future contributions:

• Expected time commitment (full-time vs part-time)
• Role and responsibilities (CEO typically takes more)
• Unique skills and experience critical to success
• Opportunity cost (salary foregone)
• Network and connections

Risk factors:

• Who can execute if others leave
• Replaceability of each founder's skills
• Commitment level and runway

Many advisors suggest avoiding 50/50 splits for two founders because it creates deadlock potential, though equal splits can work with clear decision-making frameworks. The conversation should happen early, be documented in writing, and include vesting to protect all parties.

Yes, founder vesting is strongly recommended and often required by investors. Vesting protects all co-founders and the company from situations where a founder leaves early but retains a large equity stake. Without vesting, if a co-founder with 40% equity leaves after six months, they keep that 40% while remaining founders continue building the company.

Standard founder vesting is typically 4 years with a 1-year cliff, similar to employee vesting. Some variations include:

• Shorter vesting periods (3 years) for founders who have already worked together extensively
• Immediate vesting of a portion (10-25%) to credit past work
• Different cliff periods or no cliff for founders with proven commitment

Reverse vesting is the technical mechanism for founders who receive all shares upfront but grant the company a repurchase right for unvested shares at the original purchase price if they depart.

Investors almost universally require founder vesting, and VCs may impose their own vesting schedule if founders haven't already implemented one, potentially resetting the vesting clock.

A cliff is a period at the beginning of a vesting schedule during which no equity vests. If the founder leaves before the cliff ends, they receive nothing (or their unvested shares are repurchased at cost). The standard cliff is one year, after which 25% of shares vest immediately.

The cliff serves several purposes:

• Provides a trial period to ensure co-founder compatibility before significant equity is earned
• Protects against founders who join briefly and leave with substantial ownership
• Aligns with typical investor expectations
• Creates meaningful commitment before equity is earned

Cliff considerations for founders include:

• Founders who have worked together previously may negotiate shorter or no cliff
• A founder contributing significant IP or capital upfront may receive partial immediate vesting
• Accelerated vesting provisions may apply if a founder is terminated without cause

Some founders negotiate different cliff terms based on their risk profile or prior contributions. The cliff conversation can be difficult but is essential for long-term founder relationship health.

When a co-founder leaves, the treatment of their equity depends on vesting status and departure terms:

• Unvested shares are typically subject to company repurchase at the original purchase price (often fractions of a penny per share), effectively returning them to the company
• Vested shares generally remain with the departing founder unless buyout provisions apply

The company should document the departure formally, exercise repurchase rights within the specified window (often 90 days), and update the cap table accordingly.

Considerations include:

• Good leaver vs bad leaver provisions may provide different treatment based on departure circumstances
• Buyout rights may allow the company or remaining founders to purchase vested shares at fair market value
• Voting agreements and drag-along rights should remain in effect for retained shares
• Non-compete and IP assignment provisions typically survive departure
• Tax implications arise for both the departing founder and the company

Having clear separation provisions in founder agreements prevents disputes and protects the company's ability to raise future funding without cap table complications.

Equal splits are common but not always optimal. Research on startup outcomes shows mixed results regarding equal vs unequal splits.

Arguments for equal splits:

• Signal trust and partnership
• Avoid difficult negotiations that can damage relationships
• Work well when contributions are genuinely equal
• Prevent resentment from perceived unfairness

Arguments against equal splits:

• Rarely are contributions truly equal
• Can mask important conversations about roles and expectations
• 50/50 splits create deadlock risk without a tiebreaker
• Investors may view equal splits as avoiding difficult decisions

Common unequal split factors: CEO or lead founder role (additional 5-10%), original idea generator (modest premium), full-time vs part-time commitment, domain expertise essential to the business, and capital contribution.

If you choose an equal split, establish clear decision-making authority (who is CEO, how ties are broken) and document role expectations. Many successful companies have both equal and unequal founder splits; what matters most is that all founders feel the split is fair and have vesting to ensure ongoing commitment.

Co-founders need several legal documents to properly structure their equity relationship:

• Founders Agreement or Co-Founder Agreement: Outlines roles, responsibilities, decision-making authority, equity splits, vesting terms, IP assignment, non-compete provisions, and what happens if a founder leaves
• Stock Purchase Agreements: Document each founder's purchase of shares, including number of shares, price paid, and representations made
• Certificate of Incorporation: Establishes the authorized share classes and rights
• Restricted Stock Purchase Agreements: Grant the company repurchase rights over unvested shares and document the vesting schedule
• 83(b) Elections: Must be filed with the IRS within 30 days of receiving restricted stock to avoid tax on vesting
• IP Assignment Agreements: Ensure all intellectual property created for the company belongs to the company, not individual founders
• Stockholders Agreement: Covers voting arrangements, transfer restrictions, right of first refusal, co-sale rights, and drag-along provisions
• Board Consent: Documents the board's approval of stock issuances

These documents should be prepared by an attorney experienced in startup formation to ensure proper tax treatment and investor-ready structure.

Acceleration provisions cause unvested equity to vest immediately upon certain triggering events, protecting founders from losing equity in specific scenarios.

Single-trigger acceleration vests equity upon one event, typically a company acquisition. This means all founder equity vests immediately when the company is sold, regardless of whether the founder continues with the acquirer.

Double-trigger acceleration requires two events, typically acquisition plus termination or demotion within a specified period (usually 12-24 months). This is more common and investor-friendly because it doesn't create immediate departure incentives upon acquisition.

Founders should negotiate acceleration because:

• Acquirers may want to retain founders and could use unvested equity as leverage
• Termination after acquisition shouldn't result in equity forfeiture
• It aligns founder and shareholder interests in exit scenarios

Typical provisions include full acceleration (100% vests) or partial acceleration (12-24 months of additional vesting). Investors generally accept double-trigger acceleration but may resist single-trigger because it reduces founder retention incentives.

Acceleration terms should be established before fundraising because investors will scrutinize and potentially modify these provisions.

Adding a co-founder after formation requires careful structuring to be fair to existing founders while providing meaningful equity to the new co-founder.

Equity allocation options:

• Issuing new shares (dilutes existing founders proportionally)
• Existing founders transferring shares (no dilution but founders bear the cost directly)
• A combination approach

The new co-founder should receive a fresh vesting schedule, typically 4 years with 1-year cliff, starting from their join date. Existing founders don't restart vesting but may have remaining unvested shares.

Considerations include:

• How much the company has progressed since founding (more progress generally means less equity for new co-founders)
• The new co-founder's expected contribution and role
• Market rates for the position if they weren't a co-founder
• Maintaining enough equity to attract future key hires

Documentation required: Board approval of new share issuance, stock purchase agreement with vesting, updated cap table, 83(b) election if applicable, amendments to founder agreements, and IP assignment and confidentiality agreements.

Existing founders should also update their agreements to include the new co-founder in voting arrangements and other provisions.