Founders' Agreements and Equity Splits

A famous scene in 'The Social Network' shows how the relationship between Mark Zuckerberg and Eduardo Saverin implodes over who owns what.

A solid founder's agreement is the armor that protects you from that mess. Some lawyers liken it to a pre-nuptial agreement.

It's the unsexy but essential stuff that either makes you bulletproof or sets you up for disaster.

Why equity splits matter (It's not just about greed)

Think of your equity split as the foundation of your company. 

Get it wrong, and resentment brews, decision-making stalls, and your startup crumbles. Get it right, and you've got a team aligned around building something remarkable.

Equal splits seem fair, right? Often they're not.

Equality can mean everyone has a say, but nobody has a final say. This leads to deadlock and paralysis.  A slightly uneven split where one founder has that tie-breaking vote can be far more effective.

Think dynamic, not static.  Maybe an equal split works at the start, but if one founder ends up pulling far more weight, don't be afraid to revisit and rebalance.

An effective equity split recognizes the unique value each founder brings:

The Hustler: Sweat equity counts. If one of you is coding 24/7 while the other works a day job, that needs to be reflected.

The Rainmaker: Early cash infusions or a proven sales track record might justify a larger slice of the pie.

The Visionary: Some ideas are just worth more. If you're the brains behind the whole operation, that has value.

Roles and responsibilities

It's not enough to know who's the "idea person" and who's the "coder."  

Don't fight over who does what later. Spell it out now. 

Who is CEO? Who is CFO? Does the 21 year of CTO step down if the company scales beyond his capabilities and senior developers need to be brought in. Who makes hiring decisions?

Don't neglect the day-to-day functions. Who handles marketing, sales, etc.? Put this directly in your employment contracts as well.

Negotiating this section of the founders' agreement can be a great forcing function for founders to discuss topics that they need to talk about openly.

The IP clause

Who owns the brilliant stuff your brains create? Who owns ideas you pitched together at Pitch Nights before incorporating? Who owns code one founder wrote before meeting the other.

Don't leave this open to debate.

Compensation honesty

Talk salaries or be prepared for resentment when money gets tight. 

No two founders can have identical financial needs and resources. One of you will need more money than the other  or need it quicker than the other.

Discuss and write down how much you will pay yourselves or create a formula to guide your compensation going forward. 

Vesting is your friend

Imagine vesting as gradually earning your shares in the company over time.

It's like buying a house with a mortgage you don't own the whole thing upfront, you have make payments (put in the work) to gain full ownership (all the shares).

Cliff periods: A minimum commitment

Think of a cliff as a waiting period before vesting kicks in. 

Let's say you have a one-year cliff. That means you don't receive any ownership (shares) until you've been working on the startup for at least a year. 

This discourages someone from jumping ship right after you get funding and leaving you holding the bag.

Common vesting schedule: Four year quarterly vesting with a one year cliff

Most startups use a four-year vesting schedule. Here's how it works:

Year 1: For the first year, you don't get any shares. This is the one year cliff. As soon as the first year ends, you get a quarter of the shares allocated to you all at once.

Year 2: The cliff only applies to the first year. From the start of year two onwards, you get every year's allocation of shares split over four quarters.

In other words, every quarter (i.e. every three months), you get 1/16th of the total shares allocated to you.

Year 3 & 4: Same drill you vest another 25% each year, until you own all your shares by the end of year 4.

Exit plans

Someone wants to sell, someone else wants to go public.

Someone is OK with getting acqu-hired by Google and becoming Senior Vice President.

Does the company buy their shares? Can they still vote them? Do they sign a non-compete?

Have this talk BEFORE things get heated.


The founder's agreement isn't set in stone

The early days are chaotic. Things change, people change. Your agreement is a living document, so revisit the terms regularly.

Startups require tough, sometimes uncomfortable conversations. Don't shy away from those. 

Having a well-crafted agreement gives you the framework to be honest, renegotiate fairly, and keep your focus on building something awesome instead of tearing each other apart.