Equity basics for founders: splits, vesting, cliffs and option pools
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Ownership decisions made in a startup's first weeks can shape the company for years. Founders often agree them in a hurry, over a coffee, before anyone has thought about what happens if someone leaves. This guide explains the core ideas in plain terms. It is general education, not legal or tax advice; the rules differ between countries, so use a startup lawyer and an accountant before signing anything.
The cap table
A capitalisation table lists who owns what: founders, investors, employees with options and any instruments such as SAFEs or convertible notes that will turn into shares later. Keep it accurate from day one, in a spreadsheet or dedicated software. Investors will ask for it, and errors are expensive to fix later.
Splitting equity between founders
There is no formula that fits every team. Things founders usually weigh:
- Who will work full-time, and from when.
- Skills and roles over the next several years, not just who had the idea.
- Money each person puts in, and salaries forgone.
- Risk taken, such as leaving a secure job.
Equal splits are common because they avoid resentment and signal a partnership of equals. Unequal splits are fine if everyone thinks they are fair. What causes trouble is a split nobody discussed honestly. Write down the reasoning as well as the numbers.
Vesting
Vesting means founders earn their shares over time. If someone leaves early, the company can take back, or buy back, the shares not yet earned. In the UK this is often called reverse vesting, because founders own the shares from the start and the company has a right to recover them.
- A widely used structure is four years, with shares vesting monthly or quarterly.
- A one-year cliff means nothing vests if a founder leaves within the first year; at the first anniversary a year's worth vests at once.
- Vesting protects every founder from a co-founder who walks away holding a large stake, and investors usually expect it.
Leaver provisions
Shareholder agreements often distinguish good leavers (for example, leaving through ill health) from bad leavers (for example, dismissal for serious misconduct). The two categories can be treated very differently, such as the price at which shares are bought back. Definitions vary widely, so read them carefully.
Acceleration
Acceleration speeds up vesting when certain events happen.
- Single trigger: vesting accelerates when the company is sold.
- Double trigger: vesting accelerates only if the company is sold and the founder then loses their role. Investors and buyers generally prefer double trigger.
US tax note: the 83(b) election
In the United States, founders who receive shares subject to vesting commonly file an 83(b) election with the IRS, choosing to be taxed on the shares' value when granted rather than as they vest. The deadline is 30 days from the grant and cannot be extended. Talk to a tax adviser immediately after incorporation.
Option pools
An option pool is a block of shares reserved for future employees, granted as share options. Investors in a priced round often ask for a pool to be created or enlarged before their investment, which means the dilution falls on existing shareholders rather than on the new investor. Size it to your actual hiring plan rather than accepting a large number by default. In the UK, many startups use EMI (Enterprise Management Incentives) options, a tax-advantaged scheme with eligibility conditions; check HMRC guidance and take advice.
Dilution
Each time new shares are issued, every existing holder's percentage falls, even though the number of shares they hold stays the same. As a simple illustration, if a founder owns half the company and new investors take a fifth of the enlarged company, the founder ends up with four fifths of their previous half: 40 per cent. Dilution is normal if the company's value grows by more than the percentage given up.
Put it in writing early
A founders' agreement or shareholders' agreement should record ownership, vesting, roles, leaver terms, decision-making and that intellectual property belongs to the company. Doing this while everyone gets along is far easier than during a dispute.
How did your team decide its split, and would you do anything differently? Share in the comments.