Equity6 min read

How to split equity

50/50 sounds fair, but it's often the worst choice. Here's how to split equity fairly and what to do if someone leaves.

Most partnerships don't break up over the idea, they break up over equity. Not right away, but a year later, when one person is doing more and the other still owns the same share. That's why you should agree on the split at the start, while you're still on good terms.

Don't split by who had the idea

An idea is worth little. What counts is what each of you will do over the next 3–4 years. Split based on future contribution, not on the past.

Five questions for the split

  • Who works on this full-time, and who does it on the side?
  • Who is putting in money, and how much? (It's better to lend money to the company than to turn it into equity.)
  • Whose skill can the project not get started without?
  • Who is taking on the risk: quitting their job, investing their savings, signing contracts?
  • Who will lead the company when things get hard?

Have each partner answer on their own, then compare. Where you disagree is where the real conversation is.

Vesting: equity is earned over time

The most important rule: equity isn't handed out up front, it's earned. The usual setup is 4 years, with the first year as a trial period (the "cliff"). If someone leaves after 6 months, they leave with nothing. If they leave after 2 years, they keep half of their share.

Example: you agreed on 50/50. Your partner leaves after 18 months. With vesting they keep about 19% (18/48 of 50%), and the rest goes back to the company for a new partner. Without vesting they keep 50% of a company they're no longer building.

What if someone leaves

  • "Good leaver" (illness, family, mutual agreement): keeps the part they've earned.
  • "Bad leaver" (fraud, joins a competitor, stops working): the company has the right to buy back their shares at nominal value.
  • Write down in advance the price at which the company buys back shares.

When 50/50 does make sense

When you both work full-time, both invest a similar amount and are both irreplaceable. In that case, be sure to agree who has the final say in which area, otherwise every argument is left without a way out.

This is not legal advice. Once you've agreed, have a lawyer write it into the company's founding agreement or an agreement between the members.
Do it together on FoundmatesWrite down the split, who does what and what happens if someone leaves. Both partners approve it.
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General information, not legal, tax or investment advice.

How to split equity · Foundmates