Equity and cofounder agreements

~9 min read

Why it matters

Equity is how you split the upside of work that has not paid off yet. The split, and the vesting around it, decide whether a cofounder can leave in month four with half the company, and whether the person who stays is still willing to. Most early blowups are not about the idea. They are about unclear expectations that were never written down. Get the concepts right, then let a lawyer write the agreement. Do not download a template and “make it fair” yourselves at 1 a.m.

Not legal, tax, or relationship advice. Concepts only. Paper it with counsel — see Incorporation.

Core concepts

Look forward, not backward. The relevant question is “who is going to do the work for the next several years,” not “who thought of the idea in September.” The idea is the cheap part. Execution is the company. A split that heavily rewards the person who “had the idea” and lightly rewards the person who will build it tends to break.
Full-time cofounders who start together are usually near-equal. A 50/50 or 60/40 between two people both quitting alternatives and both doing the job is normal. A 90/10 “cofounder” is an early employee with a confusing title. If you cannot look them in the eye and explain the gap, the gap is wrong.
Vesting is the agreement. Stock or options are earned over time, commonly four years with a one-year cliff: leave before a year and you keep little or nothing; after that, you keep a fraction that grows monthly. Vesting is what makes a breakup survivable. “We trust each other” is not a substitute. Single founders vesting their own shares is also normal — future investors expect it.
Write the expectations that equity is a proxy for. Who is full-time, and as of when. Who owns product, who owns distribution. What “leaving” means. What happens to unvested shares. How decisions get made when you disagree (a tie-break beats a stalemate). These belong in a cofounder conversation and in documents a lawyer recognizes, not only in a vibe.
Advisors and early helpers get a little, with vesting, for specific help. Single-digit tenths of a percent, not “10% for intros.” If someone wants cofounder equity, they should be doing cofounder work.
The option pool is for people who are not founders. It is how you hire. Creating it dilutes someone. Know that before an investor “asks you to refresh the pool” as if it were free. Hiring numbers live in Hiring; the pool is the currency.
If you are joining, you are on the other side of this. Ask: percent, fully diluted; vesting length and cliff; vesting start date; what happens if you’re fired vs you quit; whether early exercise exists. You are not being difficult. You are reading the agreement the founders should already understand. Cash salary and runway belong in the same conversation — equity in a company with six weeks of cash is a lottery ticket. See Runway.

What to do next

Have the awkward conversation this week, before more code lands: split, full-time date, roles, and what happens if one of you gets a return offer and leaves.
Agree that founder equity vests. If someone refuses, treat that as information about the partnership, not as a legal technicality.
Write a one-page plain-language summary of what you agreed. Hand that page to a lawyer to turn into real stock documents. Do not sign each other’s Google Doc and call it done.
Start a cap table (even a spreadsheet) that matches the documents: founders, pool, anyone else. Update it when something changes. Memory is not a cap table.
If a third person is “kind of involved,” decide this month: cofounder, advisor with a small grant, or friend who helps for free. Limbo is how cap tables rot.
If you are the person joining, read the offer and write your questions before you negotiate the number. The structure matters as much as the percent.

Mental model

  company = 100%
     |
     +-- founders, vesting over ~4 years (cliff ~1 year)
     +-- option pool, for future hires (not "extra" — it dilutes)
     +-- later: investors

  a fair split answers:
     who will do the work from today forward?
     can the company survive one person leaving?

  paperwork:  lawyer-grade agreements
  not paperwork:  a handshake plus a Notion page

Trust is why you start together. Vesting is why the company can continue if trust runs out.

Common failure modes

No vesting because it feels cold. It feels cold the night you agree to it and very expensive the month someone leaves. Do it while you still like each other.
Equal equity, unequal commitment. 50/50 with one person full-time and one person “nights and weekends indefinitely” is not equal. Match the split to the forward commitment, or wait until both are actually in.
A silent cofounder on the cap table. Someone whose name is on the docs and whose Slack has been quiet for a semester. Talk now, while the fix is a conversation.
Promising equity in Slack. “I’ll give you 5%” with no board approval, no vesting, and no securities advice is how you collect both a resentful friend and a legal problem. Introduce them to the lawyer path or don’t promise.

Watch

Co-Founder Equity Mistakes to Avoid | Startup School — Y Combinator. The splits and “handshake equity” mistakes that actually kill early teams.
Keys To Successful Co-Founder Relationships | Startup School — Y Combinator. The relationship underneath the cap table: expectations, stress, and how breakups start.
Legal and Accounting Basics for Startups with Kirsty Nathoo and Carolynn Levy — Y Combinator. The vesting and founder-stock section is the legal companion. Again: a map of what to ask counsel, not a do-it-yourself filing guide.