Equity Best Practices for Co-Founders in a Startup

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Image by Sum_of_Marc via Flickr

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?

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