How should co-founders decide on an equity split?

There is no fixed formula: factors typically include capital contributed, time commitment, prior IP or assets brought to the company and ongoing roles. What matters most is that the agreed split, however reached, is documented in writing along with vesting.

What is vesting and why do investors care about it?

Vesting causes equity to be earned over time rather than fully owned immediately, protecting the company if a founder departs early. Investors commonly require vesting on founder equity as a condition of investing, since it aligns founder incentives with long-term commitment.

What happens to a departing founder's equity?

This depends on the vesting and buy-back terms in the founder agreement. Typically, unvested shares are forfeited or repurchased at a nominal price, while vested shares are retained by the departing founder unless the agreement provides otherwise.

Do we need a formal founder agreement if we already trust each other?

Trust does not resolve what happens in specific scenarios: departure, disagreement over strategy, or unequal future contributions. A written agreement addresses these scenarios before they become disputes.

What is a most-favored-nation provision in an investor side letter?

It gives an investor the right to receive terms at least as favorable as those given to later investors in the same or a subsequent round, protecting early investors from being disadvantaged relative to later ones.

Founder & Investor Agreement Attorney

Founder equity, vesting and investor-relationship documentation for growing companies.

The agreement that predates the investment

Before outside capital arrives, founders benefit from a written agreement covering equity split, roles, vesting and what happens if someone leaves. Investors routinely ask about this during diligence, and its absence is a common source of later disputes.

Vesting and founder equity protection

Vesting schedules cause founder equity to be earned over time, typically over four years with a one-year cliff, protecting the company and remaining founders if someone departs early. Reverse vesting on already-issued founder shares achieves the same effect for founders who received shares at formation.

Roles, decision-making and departure scenarios

Defined roles and decision-making authority among co-founders.
IP assignment confirming that work product belongs to the company, not the individual founder.
Departure and buy-back mechanics for unvested and vested shares if a founder leaves.
Dispute-resolution provisions for disagreements among founders.

Investor-side agreements

Alongside the primary investment instrument, investors sometimes negotiate a separate side letter covering matters such as information rights, pro rata rights, or most-favored-nation treatment relative to future investors. These should be consistent with, not contradictory to, the company's other governing documents.

Process

1
Founder terms
Document equity split, roles, vesting and IP assignment among co-founders.
2
Formation
Reflect these terms in the company's formation and governance documents.
3
Investor documents
Draft the investment instrument and any investor side letter for the capital raise.
4
Maintain
Update governing documents as equity, roles, or investor rights evolve.

Answers

Frequently asked questions

How should co-founders decide on an equity split?: There is no fixed formula: factors typically include capital contributed, time commitment, prior IP or assets brought to the company and ongoing roles. What matters most is that the agreed split, however reached, is documented in writing along with vesting.
What is vesting and why do investors care about it?: Vesting causes equity to be earned over time rather than fully owned immediately, protecting the company if a founder departs early. Investors commonly require vesting on founder equity as a condition of investing, since it aligns founder incentives with long-term commitment.
What happens to a departing founder's equity?: This depends on the vesting and buy-back terms in the founder agreement. Typically, unvested shares are forfeited or repurchased at a nominal price, while vested shares are retained by the departing founder unless the agreement provides otherwise.
Do we need a formal founder agreement if we already trust each other?: Trust does not resolve what happens in specific scenarios: departure, disagreement over strategy, or unequal future contributions. A written agreement addresses these scenarios before they become disputes.
What is a most-favored-nation provision in an investor side letter?: It gives an investor the right to receive terms at least as favorable as those given to later investors in the same or a subsequent round, protecting early investors from being disadvantaged relative to later ones.

Official sources

Consult the official sources above for current rules and procedures.

Founder & Investor Agreements