How to Split Equity With a Co-Founder
The co-founder split is one of the earliest and most emotional decisions in a startup. Get it roughly fair, protect it with vesting, and write it down. The vesting matters more than the exact numbers.
How should co-founders split equity?
Split based on what each person will contribute from here, not only on who had the idea. Founders who start together, work full time and take similar risk often split equally or close to it. An unequal split makes sense when one founder started much earlier, put in significant money or IP, or will carry a clearly larger role. Whatever the numbers, everyone vests.
| Factor | Points toward more equity |
|---|---|
| Time | Full time from the start versus part time |
| Role | CEO or technical lead carrying the main risk |
| Prior work | Months of work, prototype or customers before others joined |
| Capital | Cash put in, not repaid as a loan |
| Opportunity cost | Salary given up to join |
Why do founders need vesting?
Because co-founders sometimes leave. With vesting, a founder earns their shares over time, commonly four years with a one-year cliff; if they leave early, the company can buy back unvested shares. Without it, someone who leaves after six months keeps their full stake, which hurts the remaining team and scares investors. Vesting for employees is covered in employee stock options.
| If Founder B leaves after | Vested | Company can repurchase |
|---|---|---|
| 6 months | 0 | 4,500,000 |
| 18 months | 1,687,500 | 2,812,500 |
| 48 months | 4,500,000 | 0 |
What is acceleration?
Acceleration speeds up vesting on certain events. Single-trigger acceleration vests shares on a sale of the company. Double-trigger vests them only if there is a sale and the founder is then let go without cause. Investors generally accept double-trigger and resist single-trigger, because it can make a company harder to sell.
What tax steps matter at founding?
In the US, founders whose shares are subject to vesting usually file an 83(b) election so they are taxed on the shares’ value at issue, typically near zero, instead of as they vest. The election must be filed no later than 30 days after the shares are transferred (IRS Form 15620); a missed deadline can’t be fixed.
In Canada there is no 83(b) equivalent, but founders often issue shares at a nominal price at incorporation and may hold them through holding companies or family trusts for tax planning. Get advice before issuing founder shares. Choosing federal or provincial incorporation is covered in incorporating a startup in Canada.
Vesting matters more than the split.
A slightly unequal split rarely sinks a company. An unvested founder who leaves early often does.
What should co-founders put in writing?
- The split and the reasons, agreed openly.
- Founder vesting with a cliff and repurchase rights.
- IP assignment from every founder to the company.
- Roles, decision rights and what happens if someone leaves.
- A shareholders’ agreement drafted by a lawyer.
Then record it all on the cap table and plan the employee option pool. Future rounds dilute everyone, as shown in dilution and funding rounds.
Frequently asked questions
Should co-founders split equity equally?
Often close to equally when they start together and contribute similarly. Unequal splits are fine when contributions clearly differ.
Do founders need vesting?
Yes. Four years with a one-year cliff is common and protects the team if a founder leaves early.
What is a vesting cliff?
A period, usually 12 months, before any shares vest. Leaving before the cliff means no shares vest.
What is an 83(b) election?
A US tax election to be taxed on restricted shares when issued rather than as they vest. It must be filed within 30 days.
Is there an 83(b) election in Canada?
No. Canadian founders usually issue shares at a nominal price at incorporation and get tax advice on structure.
What is double-trigger acceleration?
Vesting that speeds up only if the company is sold and the founder is then let go without cause.
Sources & further reading
Standard documents and tax rules change. These sources let you check the current terms directly.