An entrepreneur approached me recently to ask for advice around equity sharing with his co-founder. There’s no “right” answer for percent ownership but there are a few general best practices that all co-founders should follow.
Here are equity-related best practices all co-founders should follow:
- Require a four year vesting schedule where the equity vests monthly (another option is milestone-based vesting, which is also worthwhile — the key is to always have vesting)
- Require a one year cliff where if any co-founder leaves in the first year they get no equity
- Incorporate a buy/sell agreement that spells out what happens to equity owned by a co-founder once an owner leaves the business, if anything (e.g. does the startup have the option to buy back the equity? at what price?)
- Document what each co-founder brings to the table in terms of time commitment, IP, networks/contacts, etc
These best practices help set ground rules in the event things don’t go well or a co-founder decides to leave. People have the best of intentions when starting a company but it’s hard to know how personality styles and work ethics match or don’t match.
What else? What are some other equity-related best practices co-founders should follow?