For any new startup, one of the most critical early decisions founders will make is how to structure founder equity and ownership stakes in the company. This will determine the split of shares, the respective voting power, and financial returns for founders if the company succeeds and eventually provides liquidity via acquisition, IPO, or other means.
Poorly structured founder equity can sow discontent, create misaligned incentives, and make it difficult to attract key hires and investors down the road. That’s why it’s so important to carefully consider the best approach to splitting equity between founders and implementing vesting schedules early on.
While there are many ways to structure founder equity, certain best practices and standard approaches have emerged. Every founding team’s situation will be unique, but understanding the typical terms, dilution concerns, and communication requirements is essential. With the right equity split model and vesting schedule in place, founders can avoid difficult future conflicts and keep the team motivated towards shared success.
There is a template at the end.
Founder equity represents the ownership share that each founder receives when legally forming a new company. This equity stake, represented by stock grants and options, determines:
For founders who devote significant time and energy into a startup, their equity represents financial security. It’s the pot of potential gold at the end of the rainbow that makes the risks and opportunity costs of starting a new venture worthwhile.
Without founder equity providing potential future payoff aligned with company growth, founders would lack incentive. Outside hires with salaries and investors with liquidation preferences could reap disproportionate gains. Founder equity helps ensure that those who take the biggest early risks also earn commensurate rewards if the startup succeeds.
Properly structuring founder equity also ensures commitment and focus. Ill-defined founder stakes or lack of vesting opens the door for disputes down the road. And co-founders with mismatched incentives or time horizons could hurt the company’s success.
While each startup situation is unique, certain standard reference points have emerged for typical founder equity percentages at technology startups:
Sole Founder – 100% equity
For companies with just one founder, that individual will naturally maintain complete ownership of the equity initially. However, sole founders will still implement vesting schedules for themselves and inevitably dilute their equity stake as employees and investors join.
Two Cofounders – 50/50 or 60/40 equity split
Two co-founders will most often split equity close to equally, with 50/50 being the default. However, factors like prior experience, unequal contributions or roles, or introduction through one co-founder may tilt the balance to a 60/40 or similar split.
Three Cofounders – 40/40/20 or 33/33/33 split
Three co-founders commonly take an equal 33% share each. But certain third co-founders with lesser roles or who join later may receive smaller 20% stakes.
More than 3 Cofounders – Equal or benchmarked against role
With larger founding teams, equal splits become impractical. Equity may be divided based on functional roles and responsibilities. Otherwise, stakes will be determined based on circumstantial factors and negotiations.
First Hires – 10% or less
Key early non-founder hires may also receive small equity grants, typically up to 5-10% collectively prior to subsequent dilution. Their stakes serve as supplemental compensation for taking on risk and FORMATTING early-stage roles.
These initial equity splits will be further affected by additional dilution over subsequent funding rounds. But founders aim to maintain the relative proportions between themselves as others join.
While standard splits provide useful benchmarks, many circumstantial factors influence the ideal founder equity distribution:
There is no set formula. But discussing these types of factors openly between co-founders before finalizing equity can prevent future conflict. Circumstances will also evolve over time, necessitating revisiting equity splits occasionally.
Ultimately, founders must balance fairness with providing motivational upside potential. While equal or role-based splits are common starting points, no two startups are the same.
Once proportional founder equity splits are set, implementing vesting schedules is critical. Vesting means that founder equity is divided into portions awarded gradually over time. Rather than receiving 100% of equity immediately, founders earn it incrementally by staying actively engaged with the startup.
Typical vesting schedules distribute equity over 3-5 years with a one year “cliff”. For example, equity may vest monthly over 4 years with a 1 year cliff. That means the founder receives no equity for the first year, then gradually gains full awarded equity by the end of year 4.
There are several major benefits to founders adopting vesting schedules for their equity:
In summary, vesting incentivizes sustained high performance while keeping founders invested in the startup’s success. Standard vesting terms make equity work most powerfully as a motivational tool.
Beyond benefits to founders themselves, founder vesting schedules also advantage the company:
Overall, vesting schedules help create the right motivational and cultural dynamics for startup success. While founders make sacrifices, proper vesting ultimately aligns incentives for maximum benefit to the company.
This covers why founder equity and vesting arrangements matter so much. In the following sections, we’ll explore approaches to splitting equity, typical vesting schedule structures, and how to navigate tricky dynamics with co-founders. Get these elements right from the start, and your startup will reap the benefits for the long haul.
With an understanding of why properly structured founder equity matters so much, the next key question is how should equity be divided in the first place?
There are several standard approaches startups take to splitting equity between co-founders and early employees, each with their own advantages and drawbacks. We’ll analyze the most common frameworks to evaluate what may work best for your particular situation.
The default approach taken by many startups is splitting equity evenly between co-founders, such as two founders each receiving 50% or three founders each getting 33%.
Pros
Cons
Overall, equal splits are appealing in their simplicity and inherent fairness. But the lack of nuance around value contributed can become problematic down the road for some teams.
Rather than defaulting to equality, some startups will weight equity splits based on founders’ relative experience levels. First-time founders may receive smaller stakes, while serial entrepreneurs receive larger portions.
Pros
Cons
Basing splits on experience makes sense in some cases but can be demotivating or too reductionist if applied dogmatically. Subsequent success often comes down to more than just startup experience.
Rather than just experience, founders can divide equity based on tangible contributions each person brings to the table.elements like relationships, experience, capital, products built, and connections may determine stakes.
Pros
Cons
Contribution-based splits create strong incentives but require prudent judgment around valuing elements that different founders bring to the table. Contributions and equity may diverge over time.
Another approach is to match equity splits to founders’ formal roles and responsibilities in the company. For example, a CEO may receive 40% equity, a CTO 30%, and a COO 30%.
Pros
Cons
Role-based splits reduce individual negotiation but still rely on determining the relative heft of different leadership roles. As teams and needs evolve, roles must be re-evaluated.
Rather than adhere dogmatically to one framework, founders can take a hybrid approach using multiple factors to determine equitable splits. For example, experience, proposed roles, and demonstrated contributions to date could all be weighed.
Pros
Cons
Hybrid models involve more complexity but allow flexibility in determining the right balance of factors. Commitment to an agreed upon framework is critical.
As with most business partnerships, there are trade-offs to each approach. Thoughtful analysis of team dynamics and envisioned future roles allows founders to take a tailored approach. There are no universal answers, only guidelines to thoughtfully discuss and align on as a founding team.
While founders make their best effort to define equitable founder equity splits up front, circumstances inevitably evolve. As the startup progresses, teams grow, and roles change, founders should revisit splits to ensure continued alignment.
Here are some best practices around adjusting equity over time:
Plan periodic checkpoints – Build in 6 month or annual reviews of splits to check if adjustments feel warranted based on changing dynamics.
Establish guiding principles – Ensure the team agrees on core principles for evaluating changes such as value added, role criticality, and commitment level.
Consider gradual tweaks – Rather than sudden radical changes, incremental 5-10% adjustments often work best if needed.
Don’t wait for a crisis – Don’t force a rework only once things reach a breaking point. Be proactive about changes.
Lean on advisors – Trusted mentors or advisors can assess the situation more objectively and propose solutions.
Focus on the mission – Framing proposed adjustments around serving the startup’s mission depersonalizes disagreements.
Get aligned on process – Having a shared understanding of if/when/how splits would be revisited avoids surprises.
With the right mindset and agreed upon processes, founders can make equitable adjustments while avoiding destructive conflict. The guiding priority should be setting up all co-founders for shared motivational success.
This covers common frameworks for approached splitting founder equity, along with key considerations around adjusting over time. Properly aligning equity splits and vesting schedules between co-founders paves the way for a smoothly functioning leadership team. In the next section, we’ll dive into typical vesting schedule structures and terms.
Once proportional equity splits are determined, implementing founder vesting schedules is the next key step. Vesting ties earning full founder equity grants to long-term commitment and performance standards. This better aligns incentives and motivations.
We’ll examine what vesting entails along with common structures and terms to implement effective equity vesting schedules.
Vesting means that rather than receiving 100% of founder equity immediately upon forming the startup, equity is divided into portions that gradually “vest” over an extended period of time.
For example, founder equity may be structured to vest over 4 years with a 1 year cliff. In that scenario, the founder would earn no equity for the first 12 months. After that cliff period, they start gradually vesting their shares on a monthly or quarterly basis over the remaining 3 years until fully vested after 4 years.
If a founder leaves before the end of the vesting period, all unvested equity is forfeited back to the company. The amount vested by time of departure is retained by the founder.
There are several compelling benefits to vesting founder equity:
Overall, vesting transforms equity into a tool that motivates sustained high performance and commitment from founders. It also protects the startup by keeping unvested equity available for future key team members.
While specifics vary by situation, here are typical vesting schedule terms:
Total Vesting Period – The standard total duration for founder equity to fully vest is 4 years. Shorter periods like 2-3 years are also sometimes used.
Cliff Period – Most vesting schedules have a 1 year cliff prior to initial vesting. A smaller 3-6 month cliff is also reasonable for speedier startups.
Vesting Occurrence – After the cliff, vesting usually occurs monthly or quarterly over the remaining period. Monthly is more gradual and common.
Vesting Triggers – Pure time-based vesting is standard, but performance milestones or event-based vesting can also be used.
Acceleration Conditions – Accelerated full vesting may occur on events like a sale of the company or founder termination without cause.
Extendability – Vesting periods can often be extended in the event of leaves of absence or other interruptions in service.
4 years with a 1 year cliff then monthly vesting is the most standard model. But founders can tailor various terms to match their specific needs and incentives. The key is establishing clear vesting parameters upfront.
While basic time-based vesting is most common, some startups may opt for more creative vesting structures:
Rather than a set time period, founders can vest equity only upon meeting specific business milestones. This could include milestones like:
Milestone-based vesting ensures founders are incentivized to drive progress on business priorities. But it can be complex to define and measure appropriate goals upfront.
For founders in roles like sales, performance-driven vesting can be applied using metrics like:
Performance vesting directly incentivizes ongoing high achievement. But suitable metrics must be carefully chosen.
Hybrid time and milestone models are popular, such as requiring both a time duration and milestone achievement. For example, 50% may vest based on tenure while 50% vests upon milestones.
Layered vesting incorporates multiple vesting schedules for different equity grants. For instance, founders may get some portion of equity upfront, another tranche with time-based vesting, and a final portion tied to milestones.
Rather than extending initial vesting periods indefinitely, some startups issue periodic new equity refresh grants with a new vesting schedule. This re-ups motivation while avoiding excessive dilution.
These more creative structures allow founders to closely align vesting with their unique priorities and incentives. The complexity must be carefully managed to prevent misalignment or disputes. But tailored vesting approaches can maximize motivation.
Properly designing founder equity splits and vesting is crucial for setting up your startup’s leadership team for unified success. Take the time to analyze your specific situation and goals to develop an equitable founder equity plan. The long-term rewards will be well worth the upfront effort.
In the next section, we’ll look at approaches to balancing founder incentives and avoiding conflicts over equity.
We’ve covered the foundations of founder equity splits and vesting schedules. With those building blocks in place, how should you go about structuring equity and vesting for your particular startup?
There is no one-size-fits-all solution. But we’ll outline some frameworks you can use as starting points and best practices to implement smooth founder equity plans.
To keep things straightforward when just starting out, founders commonly take one of two basic approaches:
This is the simplest and most common model. For example, two co-founders would each get 50% equity. All founders would implement identical 4 year vesting schedules with 1 year cliffs.
This approach provides equal control and incentive. The equal stakes avoid endless debate over ratios. Standard vesting aligns incentives.
Downsides can be inflexibility and inability to adjust for circumstantial factors. But overall, equal splits with standard vesting works well for many young startups.
Here, equity percentages are determined by founders’ formal roles – such as 40% for a CEO, 30% for a CTO, and 30% for a COO.
Rather than purely time-based vesting, a portion of each founder’s equity vests based on them meeting initial milestones for their role. For example, the CTO may partially vest upon delivering the first working software build.
Role-based splits recognise that some positions inherently carry more responsibility and commitment. Milestone vesting incentivizes achieving priorities. But judgment calls around roles and milestones are required.
These two models balance simplicity with providing motivational incentives tailored to each founder. More complex equivalents can be created for larger or later-stage founding teams.
No matter how carefully founder equity is structured, changes to the team makeup are likely over time. Founders may leave willingly for personal reasons, be asked to step down, or be removed for misconduct.
Navigating these tricky leadership transitions requires proactive planning:
Implement robust vesting – Vesting ensures unvested equity can be re-allocated after a founder’s departure. Make sure vesting terms are clear.
Define buyback provisions – Buyback terms in advance make it easier to reclaim vested equity from founders leaving voluntarily.
Keep some authorized shares – Maintaining a reserve of unallocated shares creates flexibility to re-assign equity to new leaders.
Make adjustments gradually – Rather than drastic changes, smoothly reallocating former equity over an adjustment period prevents disruption.
Involve advisors – Experienced mentors can objectively mediate equity re-apportionment discussions and avoid conflicts.
With the right policies in place, equity can be responsibly reallocated in the event of difficult but often inevitable founder transitions. The goal is to minimize disruption to the mission.
When initially determining equity splits and vesting schedules, founders must navigate tricky conversations fraught with subtext and egos. Similarly, adjusting equity requires tact and care. Here are some tips:
Frame as a joint problem – Position the equity discussion as a collective challenge to find the best solution rather than a zero-sum negotiation.
Share your own motivations – Increased context helps co-founders understand your perspective and desired outcomes.
Ask curious questions – Seek to deeply understand partners’ motivations before advocating your position.
Isolate facts from judgments – Discuss concrete contributions and responsibilities before layering on subjective judgments of worth.
Propose compromises – Float experimental compromises to find equilibrium between positions rather than arguing absolutes.
Focus on the why – Return to mission and values-based reasoning to guide decisions beyond personal preferences.
With mutual trust and transparency, founders can find workable middle ground on equity splits that provide individual motivation while keeping the team aligned.
If co-founder equity negotiations become excessively challenging, bringing in outside expertise can help:
Recruit advisors – Experienced mentors or advisors often have seen startup equity disputes firsthand and can mediate effectively.
Engage a lawyer – Specialized startup lawyers can review agreements and propose legally sound compromises.
Seek an arbitrator – Professional arbitrators are impartial and skilled at achieving mutually acceptable resolutions.
Schedule facilitation – Trained facilitators can foster open dialog and better decision making between founders.
Consult HR expertise – Startup HR consultants or executive coaches specialize in resolving people-related conflicts.
While adding some cost, outside professional support may be money well spent if it preserves a high-functioning founding team aligned for success.
Equity structures and incentive alignment are complex issues that touches on both tactical pragmatism and sensitive emotions. But by focusing on shared mission, information transparency, compromise, and expert guidance when needed, founders can build equity models that bring out the best in themselves and their partners. With mutually acceptable equity terms in place, the path is cleared to focus energy on the startup’s bold vision.
In the final section, we’ll summarize key lessons on structuring founder equity and vesting schedules.
Structuring co-founder equity splits and vesting schedules is a foundational element of launching any new startup. It determines founders’ financial returns, voting control, incentives alignment, and interpersonal team dynamics.
Poorly constructed founder equity arrangements are a recipe for future conflict, resentment, and lack of motivation. That’s why investing time upfront to carefully analyze and implement equitable founder equity and vesting is so crucial.
While each startup’s circumstances call for a customized approach, certain lessons and best practices apply broadly:
Keep splits simple initially – Default to straightforward equal or role-based splits when just getting started. You can adjust later as needed.
Implement vesting from the outset – Don’t grant 100% equity upfront. Standard 4-year vesting with a 1-year cliff provides the right long-term incentives.
Take a hybrid approach – Combine factors like roles, contributions, and experience to determine equitable splits rather than a single dimension.
Make adjustments gradually – As teams evolve, tweak equity splits incrementally to maintain continuity. Radical changes risk destabilization.
Plan for departures – Provisions like buyback terms, authorized shares, and vesting enable smoother transitions when founders leave.
Communicate motivations – Increased transparency helps co-founders appreciate each other’s equity priorities and find creative compromises.
Involve advisors if needed – Experienced mentors can mediate tense equity restructuring discussions and bring objectivity.
Focus on the mission – Ultimately, equity should be structured to maximize commitment to shared mission and values.
While navigating equity conversations can be emotionally challenging, approaching them with patience and shared purpose allows founders to reach equitable outcomes.
Some final parting thoughts on setting your startup’s foundation through dialed-in founder equity arrangements:
There are no perfect answers – Every situation is different. Strive for sensible balance rather than over-optimization.
Alignment matters more than ratios – Precise percentages matter less than structuring equity to unite founders around a common goal.
Vesting enables risk-taking – Founders can take bold risks when their returns are tied to long-term success through vesting.
Transparency builds trust – Increased openness around motivations prevents misunderstandings and hurt feelings.
Values guide decisions – Referencing your startup’s vision and values helps ground tense equity debates.
Focus on the why – When discussions get bogged down in details, return to the higher purpose – why you’re building this venture together in the first place.
Approached thoughtfully and collaboratively, configuring founder equity can set your startup on a trajectory for sustainable growth powered by a united, motivated team. That shared commitment and incentive alignment becomes the bedrock for future success.
Here is an FAQ section I can add to the end of the blog post covering additional founder equity questions:
Early employees who join pre-funding should be granted small equity stakes, typically 1-5%, as a motivational supplement to salary. The portion set aside for key early hires should be agreed upon by founders and incorporated into initial founder equity splits.
Founder shares generally provide financial rights to dividends and sale proceeds, as well as voting rights to help make major company decisions. Rights can be customized in shareholder agreements and through share classes.
Advisors brought on for strategic guidance alone may receive fractional share grants that vest over time. Advisors in operational roles may be better served by standard stock option packages like employees. Context determines the ideal compensation structure.
Sole founders should still implement founder vesting schedules for themselves to incentivize long-term commitment. A 3 year schedule is reasonable for solo founders. Future employees can then also be aligned through vesting.
Founders sign a partnership agreement, like the sample above, defining splits and vesting terms. Shares are officially granted and issued through stock purchase agreements, with restrictions coded into stock certificates to enforce vesting provisions.
Founders will want pure common stock without liquidation preferences or participation rights. This ensures founders capture the full upside from a liquidity event before preferred shareholders are paid out.
If contributions are clearly imbalanced early on, consider a ratio like 70/30. The majority founder may contribute more cash, full-time work, or IP initially. But give the minority founder room to increase their equity with subsequent contributions. Outlining a vesting schedule and milestones tied to equity growth for the minority founder provides a path to even out the split.
Accelerated vesting means some or all unvested equity immediately vests if certain events occur, such as being terminated without cause or the company being sold. This protects founders from losing upside if their involvement ends through no fault of their own. Accelerated vesting gives founders more security, at the expense of less incentive to stay long-term.
Ideas have little intrinsic value – execution determines success. The founder putting in the hard work should get majority equity. But allocate the idea contributor 10-20% initial equity, vesting over 4 years, to recognize the origin. Then they must help build the business to fully vest their stake.
Custom vesting schedules with milestones, special triggers, or tranches add complexity upfront. But they also allow closer incentive alignment tailored to each founder’s role. Standard vesting is simpler, but may not fit all scenarios. Weigh added upfront complexity against potential future motivation benefits when evaluating custom vesting terms.
Focus the conversation on mutual understanding – ask about motivations and constraints. Brainstorm creative alternatives, emphasizing growing the pie vs fixed ratios. Compromise based on objective data like relative contributions. Avoid emotional appeals and ultimatums. If needed, pause discussions rather than forcing unworkable solutions. Revisit with advisors or mediators assisting.
If a founder departs, their unvested equity is returned to the pool. Their vested portion can be repurchased by the company at fair market value, if a buyback provision was predefined. Otherwise, they retain their vested equity, even after leaving. The forfeited unvested shares should be gradually reallocated to remaining founders and employees, not drastically re-apportioned upfront.
IP agreements ensure all IP developed by founders related to the business is assigned to the company, not retained by individual founders. Terms should include: clear IP definitions, exclusive perpetual assignment to the company, no use rights retained by founder, and required assistance enforcing IP rights. Legal counsel can provide assignment templates compliant with local laws.
Rules governing founder and investor rights should be enacted upfront in a shareholders agreement or bylaws. Important provisions include board composition and voting, election of officers, issuance of new shares, protective provisions for major decisions, information and access rights, dividend policy, and share transfer restrictions. Corporate counsel can help establish appropriate founder protections.
Solo founders don’t need vesting to incentivize themselves, as they hold all the equity alone. But enacting vesting signals commitment to future team members and investors. A 3-year vesting term with 50% vesting after year 1 and the remainder over years 2-3 provides motivation while recognizing the work a solo founder has put in.
Advisor stakes range from 0.1-2%, depending on time commitment and value contributed. Purely advisory arrangements may fully vest equity in 1-2 years. But advisors in more operational roles may receive standard 4 year vesting. Advisor shares should have longer exercise windows post-service than employee options.
To pull together some of the key concepts we’ve covered, below is an example founder partnership agreement and vesting schedule.
This sample agreement outlines typical terms such as:
While by no means exhaustive, this example hits on many of the major components of a typical co-founder equity agreement. It provides a starting framework that can be customized for your particular situation.
Be sure to consult legal counsel to ensure your agreement complies with applicable regulations and statutes. But a thoughtfully crafted agreement upfront can prevent headaches down the road and provide motivation by aligning all founders around shared success.
Founder Partnership Agreement
This Founder Partnership Agreement (the “Agreement”) is entered into on January 1, 2023 (the “Effective Date”) by and between:
John Smith, residing at 123 Main St, Anytown, CA 90000 (“Founder 1”)
Jane Lee, residing at 456 Oak Rd, Anytown, CA 90000 (“Founder 2”)
A. Founder 1 and Founder 2 intend to establish a business relationship for the purpose of developing and growing ABC Company (the “Company”).
B. The Company will engage in [describe business activities].
C. Founder 1 and Founder 2 wish to establish their respective equity ownership, responsibilities, and participation in the Company through this Agreement.
Now, therefore, the founders agree as follows:
Founder Participation and Duties
In witness whereof, the founders hereby execute this Founder Partnership Agreement.
Founder 1 Signature: ______________ Date: __
Print Name: _____________
Founder 2 Signature: ______________ Date: __
Print Name: _____________
