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  • 1.  Splitting founder equity

    Posted 01-24-2024 11:56

    What are best practices on splitting founder equity? Does that change if a co-founder joins after incorporation? 

    Back in April of last year, I took the plunge and incorporated my venture, deciding to kickstart things and leave the co-founder search for later. Now, with a fully launched B2C product (my second attempt after the first one didn't quite make it), I've realized the importance of having a co-founder, especially in the eyes of potential investors. I've identified a few potential candidates, but I'm unsure about the logistical aspects of equity splitting.

    Is it necessary to go through a reincorporation process to adjust share distribution? Do I need legal assistance for this, and if so, would it be more cost-effective to undergo reincorporation, considering I already have established company bank accounts and other operational elements in place?



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    Yuan Onida
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  • 2.  RE: Splitting founder equity

    Posted 01-25-2024 09:42
    Edited by Paul Bodnar 01-25-2024 09:43

    Congratulations with your fully launched B2C product.

    I will try my best to answer your questions. 

    1) Is it necessary to go through a reincorporation process to adjust share distribution? No

    2) Do I need legal assistance for this, and if so, would it be more cost-effective to undergo reincorporation, considering I already have established company bank accounts and other operational elements in place? No, but you will need to properly carry out the process. Carta is designed for this.

    I would recommend giving the cofounders equity as stock options. And have those options vest over time. The standard four year time based vesting schedule is something to consider. This has a one year cliff, 1/4 of shares vest after one year. After one year 1/36 vest each month. This increases the chances that your cofounders will stay around working for your company. If you give them equity up front nothing stops them from leaving and getting another job.



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    Paul Bodnar
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    Original Message


  • 3.  RE: Splitting founder equity

    Posted 01-28-2024 00:30

    Hey @Yuan Onida! I agree with a lot of what Paul said, and would love to add some more thoughts - 

    In my opinion, equity in business should be shared according to the RISK that the person has in joining and working on the business. By starting and launching the business, you have the most risk, which is why you own the business. If you had had a co-founder at the beginning of your business, they would likely be risking close to the same as you, so they would have likely gotten close to the same ownership that you received. Now that you've built the business and launched, you'll need to determine what kind of risk this new co-founder will be taking for your business.

    There is a cool tool on Carta's Founder Studio that can help you get an idea for the equity split - it's typically for founders when they're first starting the business and want to know how to split it, but it may still be helpful - https://app.carta.com/founders/studio/3418/tools-for-founders/?remount=q2vckf:

    There are lots of factors that go into this, and it truly is a big deal!  Let me know if you'd like to get more specific and we can chat about this more.

    Other note - I agree 1000% on the vesting that Paul mentioned. 3-4 year would be ideal in my opinion, with the one year cliff, to make sure they are earning the right to their ownership as they help you build the business.



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    Chris Hoffmann
    Founder, Equity Admin Co. - Carta admin for pre-IPO companies
    https://www.equityadmin.co/
    801.420.0441
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    Original Message


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