Getting the Equity Situation Worked Out From the Start

When a group of cofounders decides to start a new business together, they usually cover the most straightforward points, including the one that may be most consequential: how much equity each cofounder will get.

But so often—even with teams of very experienced entrepreneurs—key aspects of the cofounders’ equity ownership arrangements are left informal or are not dealt with altogether.

And that happens even though delaying the finalization of these legally binding agreements can create significant complications later, when leverage shifts and negotiating fair terms becomes far more difficult.

So what “key aspects” are we considering here? They include matters such as:

➡️Whether all or certain cofounders should actually be subject to earning their shares (or other kinds of equity) pursuant to a vesting schedule instead of automatically owning 100% of the shares allotted to them as of Day 1;

➡️What sort of “share repurchase rights” – if any – the company and/or other cofounders may have in all sorts of different situations—such as if a cofounder resigns, or is terminated for any reason, or dies;

➡️If the ownership and control of the company is shared equally between two partners, having a buy-sell mechanism to kick in if there are irreconcilable management differences or disputes that would otherwise paralyze the business and destroy the value it has built up so far.

On its face, this is straightforward: when cofounders form a company, all the important equity ownership terms should be agreed-upon and formalized in legally binding agreements.

What is less straightforward is how often that step is deferred—even when legal counsel raises it, and even when the founders themselves understand the logic.

It sounds nonsensical, but the explanations are consistent: lack of time, legal budget limitations, and a belief that any such issues will be fairly resolved if they ever come up.

Along with these reasons to defer, there is very often an assumption that there will be a calmer moment “later on” when vesting schedules, repurchase rights, and related legal arrangements can be easily dealt with and formalized.

In practice, that calmer moment rarely arrives.

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