The decisions made around allocating equity early on in a startup’s lifecycle will have major effects on its long-term financial well-being. It’s important to make strategic decisions now that will put your company in the best possible position when it comes time to attract key hires, garner investment capital, and scale your teams.

This article addresses the major considerations for allocating equity:
1. Getting started with equity allocation
2. Founder equity split and compensation
3. Tips for managing your cap table

Getting started with equity allocation
To get started in determining sound equity allocation, first consider the purposes, which include:
1. Incentivizing contributions to company growth; and
2. Promoting long-term commitment.

To ensure that both of these purposes are properly served when allocating equity, always start by asking this question: What will a co-founding team member contribute to the future growth of the business?

Equity allocation to co-founding team members should reflect an appropriate reward for the future value they’re expected to contribute. If the expected contributions are fairly equal, then the initial equity should be allocated relatively equally (e.g., 51% and 49%, etc.) And if the contributions are anticipated to be unequal, then a greater portion of the initial equity granted should be distributed to the founder(s) who will be contributing more value to the company. In addition, the founding team can make adjustments to the proposed equity allocation to account for disproportionate past contributions to the business (such as seed money contributed by co-founding team members, code, generating the idea behind the company, etc.) by increasing the number of shares allocated to those early contributors.

Other considerations include time-based vesting and the equity allocation upon incorporation.

Equity Allocation
Upon incorporation, the majority of the shares should be allocated to the founders with a small portion going to the option pool. Bearing in mind that being able to offer equity in your company will continue to be a valuable tool, I caution against giving away any large amounts of company stock (e.g. greater than 10%) without due consideration. See below under “Tips for managing your cap table” for an example of how to allocate equity to founders at incorporation.

Impose time-based vesting
Each co-founder should be subject to time-based vesting on their shares. With time-based vesting, if a co-founder leaves the company, they will be entitled to keep only the shares they have vested over time through involvement with the company.

This protects the company and the other co-founders in the event that the founding team’s initial assessment of someone’s future contributions was inaccurate. Co-founders may choose to part ways for any number of reasons. Without vesting, a co-founder could walk away at any time with a large chunk of the …