Founder Equity Agreements: Fintech

Getting Equity Right from Day One

When building a fintech or trading platform, founder equity agreements are among the most critical documents I'll create. Unlike typical startups, fintech founders face unique challenges: regulatory licensing requirements, heightened fiduciary duties, and IP considerations for proprietary algorithms.

A poorly structured founder equity agreement can lead to regulatory complications, tax inefficiencies, and founder disputes that can kill the business before it launches. This guide covers the specific equity considerations for fintech founders.

Founder Vesting Schedules

Vesting ensures that founders earn their equity over time. The standard structure protects the company if a founder leaves early while rewarding those who stay and build.

Standard Vesting Structure

• 4-Year Vesting Period - Equity vests over 48 months
• 1-Year Cliff - No vesting occurs until month 12, then 25% vests
• Monthly Vesting After Cliff - Remaining 75% vests monthly (months 13-48)
• Vesting Commencement Date - Typically when the company forms or services begin

Alternative Vesting Schedules for Fintech

Acceleration Clauses

Acceleration provisions determine what happens to unvested equity upon certain triggering events, like termination or acquisition. For fintech founders, this becomes critical during M&A or regulatory actions.

Recommended Acceleration for Fintech Founders

Most VCs and acquirers expect double-trigger acceleration because:

• Acquirers want founders to stay post-acquisition
• Single-trigger can kill deals or reduce valuation
• Protects founders if terminated without cause after acquisition
• Standard structure: 100% acceleration if terminated without cause within 12-18 months of change of control

Section 83(b) Election for Tax Efficiency

The 83(b) election is a critical tax strategy for founders receiving restricted stock. Filing 83(b) can save hundreds of thousands in taxes if the company succeeds.

How 83(b) Works

When I receive restricted stock subject to vesting:

• Without 83(b): I pay ordinary income tax on each vesting event based on the fair market value (FMV) at vesting
• With 83(b): I pay ordinary income tax upfront on the FMV at grant (often $0 or very low), then all future appreciation is capital gains

83(b) Example

When to File 83(b)

I should file 83(b) if:

• The current FMV is very low (ideally at formation)
• I expect significant company growth
• I can afford the upfront tax (often minimal at formation)
• I'm confident I'll stay with the company

83(b) Filing Checklist

1. Prepare 83(b) letter - Include stock details, FMV, amount paid
2. Sign the letter
3. Mail to IRS within 30 days - Certified mail, return receipt
4. Include copy with tax return - Attach to Form 1040
5. Provide copy to company
6. Keep proof of filing - Forever

Equity Splits and Cliff Periods

Determining how to split equity among founders is often the hardest conversation. For fintech startups, consider these factors:

Equity Split Considerations

• Technical Contribution - Who's building the platform/algorithms?
• Regulatory/Legal Expertise - Who's navigating licensing and compliance?
• Industry Relationships - Who has broker/bank/exchange connections?
• Capital Contribution - Who's funding initial operations?
• Full-Time vs Part-Time - Commitment level differences
• Opportunity Cost - What is each founder giving up?

Common Split Patterns

IP Assignment Provisions

For trading platforms and fintech startups, intellectual property—especially algorithms, strategies, and proprietary technology—is often the core asset. The founder equity agreement must address IP ownership.

Critical IP Assignment Clauses

1. Pre-Existing IP

• Schedule A: Each founder lists IP they're bringing to the company
• License vs. Assignment: Decide whether founders license or assign pre-existing IP
• Trading Algorithms: If I developed a strategy before founding, clarify ownership

2. Work-for-Hire Assignment

The agreement should state that all work created during the founder relationship belongs to the company:

• Code, algorithms, trading strategies
• Documentation, research, analysis
• Business plans, pitch decks, investor materials
• Trademark, branding, marketing content

3. Side Projects Carveout

Founders may want to preserve rights to:

• Open-source contributions unrelated to company business
• Educational content (books, courses, talks)
• Personal investments and trading activities

Confidentiality and Trade Secrets

The agreement should include:

• Confidentiality Obligations - Protect proprietary strategies and data
• Trade Secret Protection - Acknowledge that algorithms/strategies are trade secrets
• Return of Materials - Upon departure, founder must return all company IP
• Survival Clause - Confidentiality obligations survive termination

Restrictive Covenants

Restrictive covenants limit what founders can do during and after their involvement with the company. For fintech startups, these provisions are critical but must be balanced against enforceability concerns.

Non-Compete Provisions

Non-competes restrict a departing founder from starting or joining a competing business.

Enforceability Considerations

• Geographic Scope: Limit to markets where company operates
• Duration: 12-24 months typical (longer often unenforceable)
• Activity Scope: Define "competing business" narrowly
• State Law: California generally won't enforce non-competes (except sale of business)

Non-Solicitation Provisions

More likely to be enforced than non-competes:

• Employee Non-Solicit: Can't recruit company employees for X months (typically 12-24)
• Customer Non-Solicit: Can't solicit company customers
• Investor Non-Solicit: Can't pitch company investors on new ventures

Non-Disparagement

Mutual non-disparagement provisions prevent founders and the company from publicly criticizing each other. Important for:

• Investor confidence (VCs talk to former founders)
• Regulatory applications (regulators may interview departed founders)
• Recruiting and partnerships

Regulatory Implications for Licensed Entities

If my trading platform requires regulatory registration (RIA, BD, MSB, CTA, etc.), founder equity arrangements face additional scrutiny.

Control Person Analysis

Regulators care about who controls the entity:

• 25%+ Ownership: Typically deemed a control person
• Voting Rights: Board seats, veto rights, special voting classes
• Background Checks: Control persons undergo enhanced background reviews
• Form U4 Filing: Control persons may need securities licenses (BD/RIA)

Change of Control Notifications

Most regulatory regimes require advance notice for ownership changes:

• SEC/FINRA (BD): Form BD amendment for control changes
• SEC (RIA): Form ADV amendment for ownership changes
• CFTC/NFA (CTA): Form 7-R amendments
• State MSB: Prior approval often required for control changes

Character and Fitness Requirements

All founders who are control persons must meet regulator standards:

• Criminal background checks
• Credit checks (for MSB licensing)
• Regulatory action history
• Bankruptcy history

Equity Vesting and Regulatory Approval

Consider milestone-based vesting tied to regulatory approval:

• Example: 25% vests upon SEC RIA approval, then standard 3-year monthly vesting
• Rationale: Rewards founders who get through regulatory process
• Risk: If approval takes longer than expected, creates tension

Practical Guidance & Next Steps

Founder Equity Agreement Checklist

1. Equity Split: Document founder ownership percentages
2. Vesting Schedule: Implement 4-year with 1-year cliff (minimum)
3. Acceleration: Include double-trigger acceleration for change of control
4. 83(b) Election: File within 30 days of stock grant
5. IP Assignment: Assign all company-related IP to the company
6. Pre-Existing IP: Schedule what each founder brings
7. Confidentiality: Protect trade secrets and proprietary information
8. Non-Compete: Include if enforceable in your state (reasonable scope)
9. Non-Solicit: Protect employees and customers (12-24 months)
10. Voting Rights: Document voting arrangements, board seats
11. Drag-Along: Majority can force minority to sell in acquisition
12. Regulatory Compliance: Address control person status if licensed entity

Common Mistakes to Avoid

• No Vesting: Founding without vesting is a recipe for disaster
• Missing 83(b) Deadline: Set calendar reminders immediately upon grant
• Undefined IP: Ambiguity over who owns what code/algorithms
• Unenforceable Restrictive Covenants: Overly broad provisions that won't hold up
• Ignoring Regulatory Impact: Not considering how equity affects licensing applications
• No Buyback Rights: Company should have right to repurchase unvested shares if founder leaves

When to Involve Counsel

Founder equity agreements have significant legal and tax implications. Involve counsel if:

• The company will pursue regulatory registration (RIA, BD, MSB, CTA)
• Founders are contributing significant pre-existing IP
• Equity split is complex or involves multiple share classes
• You're in a state with specific restrictions on restrictive covenants
• Any founder has concerns about the proposed structure