How to Structure Equity Agreements for Co-Founders
Starting a company with co-founders is exciting, but it also means facing tough decisions early on. If you don’t structure equity agreements well, you’re basically inviting future headaches—these documents lay out who owns what, who’s responsible for what, and how things can change down the road.
The way you split equity says a lot about your values and shapes your team’s relationships. Some teams go 50/50, but sometimes that just doesn’t fit.
Founders also need to think about vesting, decision rights, and what happens if someone bails. If you get these things wrong, you’ll likely end up fighting over money or control later—and nobody wants that.
Key Takeaways
Sort out clear ownership percentages, vesting schedules, and who gets to make which decisions—right from the start.
Solid agreements protect everyone and help you avoid the most common founder disputes.
Good legal advice up front is worth it, even if it feels like overkill.
Foundational Elements of Equity Agreements for Co-Founders
Three things matter most in a co-founder equity agreement: how you split ownership, how vesting works, and what each person actually does.
Establishing the Equity Split
The split is the foundation. How much of the company does each founder get?
Equal vs. Unequal Splits
Equal splits sound fair, but sometimes they just ignore reality. Think about:
Who brings the most experience?
Who’s putting in money?
Who’s all-in, and who’s part-time?
Who’s got the best network?
Who’s really risking something here?
Common Split Approaches
Split Type When to Use Example Equal (50/50) Similar contributions and commitment Two technical co-founders with equal skills Weighted (60/40) One founder brings more value CEO with industry experience + technical co-founder Tiered (50/30/20) Three founders with different roles CEO, CTO, and advisor-level co-founder
Write the split down in an actual agreement. Seriously, don’t just shake hands and hope for the best.
Get a lawyer involved—it’s usually cheaper than fixing a mess later.
Vesting Schedules and the One-Year Cliff
Vesting means you earn your equity over time, not all at once. This stops someone from walking away with a big chunk after a few months.
Standard Vesting Structure
Year 1: Nothing vests (cliff period)
After Year 1: 25% vests at once
Years 2-4: The rest vests monthly
The one-year cliff gives everyone a trial run. If you leave before a year, you get nothing.
Some agreements have “acceleration” for situations like a company sale. That’s worth talking about up front—people have strong feelings about it.
Defining Roles, Responsibilities, and Compensation
Spell out what each founder actually does. Don’t assume everyone’s on the same page.
Who’s responsible for what?
Who gets to make which calls?
How much time is each person expected to put in?
Early on, most founders work for free, but you should still agree on what happens when money starts coming in. Will salaries be deferred? Will you get reimbursed for expenses? What about future raises?
Someone not pulling their weight? The agreement should say what happens—maybe a review, maybe a way to remove them, maybe just a tough conversation.
Make sure everyone assigns their intellectual property to the company. This covers code, designs, business plans—anything you create for the startup. It’s a must, and it should be in writing.
Structuring Terms, Protection, and Resolving Disputes
Equity agreements need to cover how ownership changes over time, especially as you raise money or add new people. They should also spell out what happens if founders fight or someone leaves.
Dilution, Equity Allocation, and Fundraising
As you raise money, your slice of the pie shrinks. Plan for it.
Anti-dilution clauses can help, but they’re complicated and not always a given. Sometimes you get pre-emptive rights to buy more shares, sometimes not. Decide if you want to set aside shares for employees before you start bringing in outside money.
Make sure your agreement says how fundraising affects each founder’s stake. Don’t leave it vague.
Decision-Making and Voting Rights
Who gets to decide what? Some things need everyone’s sign-off, others just a majority.
Class A shares: usually founders and early investors
Class B shares: often have fewer voting rights
Advisory board: gives advice, but doesn’t vote
Be clear about how you’ll change the agreement or add new people. Spell out what kind of vote is needed for big decisions.
Dispute Resolution and Founder Departures
Arguments happen. Your agreement should say what to do: talk it out, try mediation, then maybe arbitration. Court should be the last resort—nobody wants that drama.
If someone leaves, have a plan. That means vesting rules, buyback procedures, and what happens to their shares. Cover scenarios like quitting, getting fired, or even death. Each one might have different rules.
Vesting acceleration?
Share buyback?
Non-compete?
IP transfer?
Frequently Asked Questions
Founders have tons of questions about splitting equity, legal must-haves, and planning for the long haul. There’s no one-size-fits-all answer, but if you cover the basics—ownership, vesting, roles, and exits—you’re way ahead of most startups.
What factors should determine equity division among co-founders?
Dividing equity among co-founders isn't simple. Everyone's contribution—money, time, or specialized skills—should count for something.
Experience matters a lot. Someone who's already built a startup or knows the industry inside out probably deserves a bigger slice.
Who's taking on the heavy lifting? If you're stepping up as CEO or CTO, that's extra responsibility, and the equity should reflect that.
Timing changes things. Founders who join at the very beginning usually get more equity than those who come on later.
Don't forget risk. If a co-founder is quitting a stable job or pouring in their savings, that risk should show up in their share.
What are the key elements to include in a co-founder equity agreement?
Spell out the exact equity split with percentages for each co-founder. It's the only way to avoid arguments down the road.
Set up a vesting schedule—usually four years with a one-year cliff—so people actually earn their equity over time.
Decide how you'll make big decisions and what everyone's voting rights are. It's better to be clear before things get complicated.
Plan for exits. What happens if someone leaves, can't work, or passes away? Cover it in writing.
If arguments pop up, have a plan—mediation or arbitration clauses can save everyone a lot of headaches.
How can co-founders avoid common pitfalls when drafting equity agreements?
Don't just split everything equally without thinking. Fair isn't always the same as equal, especially when contributions are all over the place.
Talk about equity early—waiting only makes things messier later.
Write everything down and get a lawyer to look it over. Verbal promises just don't cut it.
Use vesting schedules. Without them, someone could leave and still walk away with a big chunk of the company.
Understand how new investments will dilute your shares. It's better to know before it happens.
What legal considerations are crucial when structuring a co-founder equity agreement?
Double-check state laws. Not every place treats equity agreements the same way.
Be aware of securities laws. Sometimes you need to disclose more or register things, depending on your setup.
Think about taxes. The equity structure you choose could affect your taxes for years—sometimes in surprising ways.
Make sure everyone knows who owns what, especially when it comes to intellectual property like code or inventions.
If you're both owners and employees, the agreement should cover both roles. It's easy to overlook this, but it matters.
How should co-founders approach equity dilution in future investment rounds?
Talk about dilution before you go looking for investors. Surprises here are rarely good ones.
Pro-rata rights let you keep your ownership steady by investing more in future rounds. Not everyone wants this, but it's good to know your options.
Anti-dilution clauses can soften the blow if the company's valuation drops in later funding rounds.
Employee stock option pools will take a bite out of everyone's shares. Decide up front how you'll handle that.
And honestly, just keep talking. The more you communicate about dilution and equity changes, the less likely you'll run into big problems later.
What are best practices for revising co-founder equity agreements over time?
It's smart to set up regular review sessions. As the company grows, co-founders need to reassess equity arrangements.
When someone hits a major milestone or takes on a new role, that might justify tweaking the equity split. Sometimes, contributions shift in ways you just can't predict at the start.
Everyone should agree before making changes. Unanimous consent protects each co-founder from surprises.
Don't skip legal counsel. A lawyer can make sure revisions are properly documented and actually hold up later.
Performance metrics help guide these decisions. Setting clear criteria upfront makes it easier to know when equity adjustments make sense.