What it means
When two or more people start a business, they must decide who owns how much. An equal split is the simplest, but it is not always the fairest, because founders may contribute different amounts of cash, time, skill and risk.
A split should reflect the future value each person will add, not just the work already done. Most modern splits use vesting, which means shares are earned gradually, often over four years with a one-year initial wait (the cliff).
If a founder leaves early, the unvested shares return to the company, which stops a departed partner from holding a large stake for work they never finished. Over time the split changes.
Every investment round adds new shares, shrinking existing percentages, and many companies set aside an option pool for future hires, usually in the range of 10% to 20%. The cap table (capitalisation table, a record of who owns what) tracks all of this.
Beyond percentages, the split decides who votes on key decisions, who receives dividends and who gets paid in a sale. Different share classes can carry different rights, so a 30% holder with preferred shares may receive more than 30% of the proceeds in some outcomes.
A written shareholders' agreement should cover how the split can change, what happens if someone leaves, and how disputes are settled. Revisiting the split in a calm moment is far cheaper than arguing about it when the company is worth millions.
Fairness is partly about perception. Founders who feel the split is reasonable are far more likely to stay committed through hard years, while a resented split quietly drains energy from the team.
Some founders use a structured method, scoring each person's contribution in areas such as idea, capital, time and responsibility, to ground the conversation in something concrete.
In practice
Real-world examples
Example 1
Two friends launching a design studio agree on 60% and 40% because one is leaving a job to work full time while the other keeps a day job for a year. The 20% difference reflects the greater risk taken, and both sign a shareholders' agreement.
Example 2
A technology start-up gives a senior engineer 2% with four-year vesting. The engineer's shares are earned monthly, so leaving after two years means keeping 1% and returning the rest. The vesting schedule protects the other owners if the engineer leaves.
Example 3
A family company redistributes shares between a retiring father and two children. The new split of 20%, 40% and 40% is written into a shareholders' agreement along with rules for selling. A lawyer reviews the agreement so that each relative understands their rights.
Think of it
An equity split is like baking a cake with friends and deciding how to slice it. The person who bought the expensive ingredients and spent hours in the kitchen deserves a larger slice than someone who just helped eat it, but everyone needs to agree on the portions before the baking starts.
Formula
Calculation
Ownership % = Shares held / Total shares in issue
New shares for an investor = Existing shares / (1 - Investor %) - Existing shares
Three founders of Tidewater Apps, a fictional start-up, hold 4,000,000, 3,000,000 and 3,000,000 shares, a total of 10,000,000, so they own 40%, 30% and 30%. An investor pays $2,000,000 for 20% of the company after the deal. Total shares after the round are 10,000,000 / (1 - 0.20) = 10,000,000 / 0.80 = 12,500,000, so 2,500,000 new shares are issued at $2,000,000 / 2,500,000 = $0.80 each. The first founder now owns 4,000,000 / 12,500,000 = 32%, and the other two own 3,000,000 / 12,500,000 = 24% each.Case study
Seen in the real world
Brightpath Learning is an illustrative, fictional education company started by three friends who split the equity three ways without any vesting. Eighteen months later one of them took a job elsewhere, still holding 33% of a business he no longer worked on.
The remaining founders found themselves doing all the work while sharing a third of every future dollar with someone absent. A buyout offer cost them $150,000 and delayed a funding round by three months.
In the illustrative rebuilding, the founders reset the split with four-year vesting and a one-year cliff, and wrote down a buy-back price for leavers. New investors then described the cap table as clean, and the later round went through without friction. The founders now tell other new ventures that vesting and a written agreement are the first things to set up, ideally on day one.
Watch out
Common mistakes
- Splitting the equity equally to avoid an awkward conversation, when contributions and commitment are unequal.
- Skipping vesting, which lets someone who leaves early keep a full stake.
- Forgetting that future investment rounds and option pools dilute everyone's percentage.
Questions
People also ask
How should founders decide an equity split?
They should weigh idea origin, cash invested, ongoing commitment, skills and risk taken, then document the logic and agree it in writing.
What is a cliff in vesting?
It is an initial period, commonly one year, before any shares vest, after which a block vests and the rest accrue gradually.
Does a bigger percentage always mean more money?
Not always, because liquidation preferences and different share classes can change who receives what in a sale.