How Should Co-Founders Split Equity and Set Vesting?

Two deadlines govern founder equity, and most founders only know about one. The first is the day you issue the shares, which should happen before anyone writes code or signs a customer. The second is 30 days after that issuance, which is the IRS deadline for the 83(b) election, and it does not extend. Get the founder equity split wrong and you can fix it with an awkward conversation. Miss the 83(b) deadline and you can face a tax bill on paper gains every time a tranche vests. This post covers how to split, how to vest, and how to paper it.

How to decide the founder equity split

An equal split is the default because it avoids a hard conversation, not because it is usually right. The split should reflect what each founder brings and what each founder will keep bringing. The factors that matter most:

• Whether each founder is full-time now, or will be only after funding
• Cash contributed, and whether it is equity or a loan to the company
• The idea and any IP a founder brings in, valued honestly rather than generously
• The role going forward: the person running the company for the next five years carries more risk than an advisor who helped at the start
• Opportunity cost, such as a founder leaving a senior salary

Have the conversation with numbers on the table, then write the result down. An unwritten understanding that “we will sort it out later” is the most common source of the founder disputes we are asked to untangle. Our business formation and structuring practice usually raises the split on the first call, because the entity documents cannot be finished without it.

One more point: the split is not permanent in effect, even if it is permanent on paper. Vesting, future hires, option pools, and investment rounds all dilute founders, and a founder who contributes more later can be granted more later. Do not try to predict five years of contribution in the initial numbers.

Why vesting protects the founders who stay

Vesting means a founder’s shares are issued now but subject to the company’s right to repurchase unvested shares at cost if the founder leaves. The market standard is four years with a one-year cliff: nothing vests for the first twelve months, then a quarter vests at once, then the rest vests monthly. Investors will insist on it, so adopting it from the start avoids renegotiating later.

Vesting is not a sign of distrust. It is insurance for whoever stays. Without it, a co-founder who leaves after six months keeps a third of the company forever, and the remaining founders work for years to build value for someone who is gone. With it, the departing founder keeps what vested and the rest returns to the company for the next hire.

Negotiate acceleration while everyone is still friendly. Single-trigger acceleration vests everything on a sale of the company. Double-trigger acceleration vests on a sale followed by termination without cause. Double-trigger is more common and more acceptable to acquirers. Also consider giving vesting credit for work done before the formal grant date, so a founder who has been building for a year does not start at zero.

The 83(b) election and the 30-day deadline

When a founder receives stock subject to vesting, the default tax rule taxes the founder as each tranche vests, on the value at that time. In a company that is growing, that means ordinary income every vesting date on shares the founder cannot sell. An 83(b) election tells the IRS to tax the entire grant now, at today’s value, which for a new company is usually close to nothing. Future growth is then capital gain on sale.

The election must be filed with the IRS within 30 days of the date the shares are issued. There is no late filing, no extension, and no fix. File it by a method that proves the filing date, keep a copy, and give one to the company. LLC members who receive profits interests face a similar question, and many advisors file a protective 83(b) election for those grants too. If you are choosing between entity types, our comparison of an LLC and a corporation for a startup explains why equity grants are simpler in a corporation.

The documents that put the split on paper

In a corporation, each founder signs a restricted stock purchase agreement that states the number of shares, the price paid, the vesting schedule, the repurchase right, and any acceleration. The board approves the issuances by written consent, the company records them in its stock ledger, and each founder files the 83(b). Each founder also signs an invention assignment agreement that transfers any pre-formation IP and all future work product to the company. Investors check this in diligence, and a missing assignment from a departed founder can hold up a financing; see our intellectual property law page for what assignment covers.

In an LLC, the same terms live in the operating agreement and in unit grant agreements. The operating agreement needs to address vesting, repurchase, and what a departed member’s economic rights look like, which we cover in what a multi-member LLC operating agreement should include.

What happens when a founder leaves

If the documents are in place, the departure follows a script. The company exercises its repurchase right on unvested shares within the window the agreement specifies, typically by paying back the nominal purchase price. Vested shares stay with the departing founder, subject to any right of first refusal on a later sale. Access to systems ends, the IP assignment is confirmed, and confidentiality obligations continue.

If the documents are not in place, the departure becomes a negotiation with a person who has no reason to be reasonable. The company may have to buy the founder out at a price that reflects the company’s current value, or live with a passive shareholder who can block certain actions. That outcome is avoidable, and the cost of avoiding it is a few documents signed in the first month. For founders who are also planning their own immigration path, our post on whether a startup founder can get an O-1 visa explains how ownership and control interact with that petition.

If you and your co-founders have not yet signed vesting and stock agreements, Capitol Law Partners can set up the split, the schedule, and the 83(b) filings before the deadline runs. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our founder agreements and equity structuring page or schedule a consultation.