Splitting equity, meaning who owns how much of the company, is one of the first real decisions you make with a cofounder and one of the hardest to undo. Here is how founders usually split shares, how they earn them over time, and what happens if one of you leaves.
This is general information, not legal advice. The rules depend on where your company is set up, and every agreement is different. Get a lawyer before you sign anything.
Talk about it before you set up the company
Have the conversation early, while the shares are worth almost nothing. Agree on:
- How many hours each of you can give, now and in six months.
- Who leads what, for example product, sales or money.
- Whether either of you needs a salary soon, or is putting in cash.
- What happens if one of you stops working on it.
Equal or unequal?
Y Combinator almost always recommends an equal or close to equal split. In a 2015 post on its blog, Michael Seibel gives the reason: all the work is ahead of you, so years of building count for more than who had the idea or started first. He adds that if you would not give your partner an equal share, you may have the wrong partner.
If you do choose an unequal split, for example because one person will be part time for a long while, write down why, and agree what happens if that person goes full time.
Vesting and the cliff
Vesting means you earn your shares over time by staying and working on the company. The usual setup, recommended by Y Combinator and listed as customary for founders by Clerky (a US legal paperwork service for startups), is four years with a one-year cliff:
- In the first year: nothing vests. Leave before one year and you walk away with none of the shares that are vesting.
- At one year (the cliff): 25% of your shares vest at once.
- After that: 1/48 of your shares vests every month.
- At four years: all of your shares have vested.
The cliff protects the company from a cofounder who leaves after a few months with a big share. Vesting usually starts when the shares are issued, and if you worked full time on the company before that, you can agree to count that time. It should apply to every founder, including the one who had the idea.
An example with round numbers
Example only, with made-up names. Maya and Omar each get 480,000 shares, split 50/50, with four-year vesting and a one-year cliff. One month of vesting is 1/48 of 480,000, which is 10,000 shares. If Omar leaves:
- After 8 months, he has not reached the cliff, so nothing has vested.
- Right after 12 months, 120,000 shares (25%) have vested.
- After 18 months, 180,000 shares have vested and he keeps them. The company can buy back the other 300,000.
- After four years, all 480,000 are his.
What happens if someone leaves
Under the usual terms, a founder who leaves keeps their vested shares, and the company can buy back the rest, often for the small amount the founder paid for them.
Some agreements, especially UK-style ones, add “good leaver” and “bad leaver” rules. A good leaver usually keeps their vested shares, while a bad leaver (for example after fraud) can lose vested shares too. Read those definitions closely.
This is where you most need a lawyer, and nothing here is legal advice. Ask them to explain what happens to your shares if you quit or if the others ask you to leave, and how to make sure the code and designs each of you made belong to the company.
Already own your shares? You can still add vesting
If shares were issued with no vesting, you can add it later. This is often called reverse vesting: you own the shares from day one, and the company can take back the unvested part if you leave. Investors generally want founder vesting in place, and Cooley GO, a startup guide from the law firm Cooley, notes that founders who set a reasonable plan early may avoid tougher terms later.
If the company is sold: acceleration
Acceleration means unvested shares vest early when something specific happens.
- Single trigger: one event, usually the sale of the company, vests them. Cooley GO says this is not the norm, even for founders, and that investors tend to dislike it.
- Double trigger: two events are needed, usually a sale and then being let go without good reason, often within 9 to 18 months after it. This is the more common choice, and Clerky lists it as customary for founders.
Where you set up changes the rules
Most of the above is common practice in the US. What applies to you depends on where the company is registered.
- A US company, for example in Delaware. If you will pay tax in the US, ask your lawyer about an 83(b) election. It lets you be taxed on the shares’ value when you get them, instead of as they vest. It must be filed with the IRS within 30 days of getting the shares and cannot be undone without the IRS’s consent, so plan it before the shares are issued.
- DIFC or ADGM in the UAE. These financial free zones have their own civil and commercial laws based on common law, separate from UAE federal civil and commercial law. ADGM applies English common law directly. Use a lawyer who knows the free zone you choose.
The UAE mainland and other free zones have their own rules again, so ask the authority you register with how vesting and buybacks can be written into your company’s documents.
If you are under 18, bring in a parent or guardian before you agree anything. Under UAE federal commercial law (Federal Decree-Law No. 50 of 2022), 18 is the age to start and run a business on your own, and from 15 a minor can trade only under conditions set by the UAE Cabinet. Free zones and other countries can have their own rules.
Write it down
Once you agree, put it on one page in plain words. For example:
Founders: Maya and Omar Split: 50% / 50% Vesting: 4 years, monthly, from the day shares are issued Cliff: 1 year Credit for work before setup: none If someone leaves: company can buy back unvested shares If the company is sold: double trigger only Company set up in: (where) Checked by a lawyer: (name and date)
Treat it as notes for your lawyer, and get a lawyer before you sign anything.
Still looking for your cofounder?
If you have not found them yet, read how to find a technical cofounder. Sapnora is where startups find the people to build with, from brand-new ideas to companies already up and running. You post what you’re building and the role you need, like a developer, and people who want in ask to join. It’s free.