So we have the entity now - Next is the ownership pie. During or after the incorporation, you should also set up an agreement to document some of the important aspects of the relationship among the co-founders. (Founders’ agreement)

One of the most important provisions of this agreement is specifying the equity ownership of each of the co-founders of the company.

I am assuming that you would want to split (almost) equally. If that’s not the case, please consider the following points -

  • Equity is intended to provide “long-term” incentives and so you would want your co-founder(s) to be as or more motivated.
  • It is more about execution than coming up with some idea.
  • Investors will look at the split and if it is too uneven you should have a strong justification. Lastly, consider the journey as a marathon rather than a sprint, and your co-founders will be your best friends soon.

You can and should have vesting of the shares (to handle the unlikely case of one of the founders exiting the startup). Usually, the vesting is time-based (have heard about milestone-based as well), with a standard 1-year cliff. The usual practice is 4-year vesting (considering it takes longer to go public you can extend it to 5-7 years). At the end of one year, you get 25% of your share, and then the rest 75% share can be distributed monthly or again yearly over the next three years.

I will discuss other clauses that you can add to handle the unfortunate case of the co-founder leaving the company in the next post.

Usual Disclaimer: All views expressed are my own as some readings recommend not splitting equally.