How Should Co-Founders Split Equity, and What Happens if One of Them Leaves?
The short answer: Split the equity however you want, then protect it with a Founders’ Agreement that sets vesting, IP assignment and exit terms. The standard is four-year vesting with a one-year cliff, so a co-founder who leaves early doesn’t walk away with a large stake. Each founder should also assign their IP to the company in writing and decide on an 83(b) election within 30 days of receiving stock.
When the Three Musketeers Become Two.
Most co-founders split equity over a handshake, often an equal split with little to nothing in writing. Then real life happens: one founder burns out, one takes a salaried job, one goes quiet for a year.
Why it matters
A departed founder’s shares don’t go away. They sit on the cap table, investors see them, and investors usually won’t want to fund a company where inactive founders own the majority. Even running the company gets difficult, since many major decisions require shareholder approval (and you have to track down that old founder to get their vote).
How does vesting work?
Vesting means you earn your shares over time. The standard is four years with a one-year cliff, but this is often tailored depending on the planned lifecycle of the company.
- Leave in the first twelve months (before the cliff), and you get nothing.
- Stay past the cliff and your shares vest a little each month for the rest of the four years.
A Founders’ Agreement can also settle whether unvested shares pay out early in an acquisition or exit (single or double trigger). These things should be decided now, not in the middle of a financing deal.
Who owns what the founders create?
The company doesn’t automatically own the code, the designs, or the logo a friend made. Each founder has to assign their IP to the company in writing. Investors and buyers check for it in due diligence, and a missing assignment can stall or kill a deal.
What is the 83(b) clock?
When you receive stock that vests over time, you can file an 83(b) election and pay tax now, while the stock is worth almost nothing. You have 30 days from the day you receive the stock to file the 83(b) election with the IRS. Miss it and you cannot go back. Talk to a tax advisor before the window closes.
The Moral of the Story
Three documents do most of the work
- A Founders’ Agreement that sets each founder’s expectations, when a founder is considered “out,” and what happens when one leaves
- A Stock Purchase Agreement that includes your vesting schedule
- An IP assignment signed by each founder
Do it at formation, before there is more value at stake. It’s a short conversation now, and it usually saves you a much more expensive one later.
General information, not legal advice, and reading it does not create an attorney-client relationship. Every company is different; talk to counsel about your situation. In some jurisdictions this article is considered Attorney Advertising. Prior results do not guarantee a similar outcome.