Equity distribution at company incorporation
At incorporation, the founders decide how many shares to issue and in what split. There is no fixed rule, but the split is usually based on each founder's role, prior contribution and expected ongoing time commitment, agreed and documented before any outside party gets involved, covering the same ground as a broader founder equity agreement.
A 50/50 split between two founders can seem fair but sometimes causes deadlock in decision-making later. Some founders prefer a small imbalance, such as 51/49, to give one person a tie-breaking vote, while still splitting economics evenly, a question worth resolving alongside vesting terms rather than after the fact.
Reverse vesting terms for founding team members
Investors increasingly expect founders' own shares to vest over time, often four years with a one-year cliff, just like employee grants. This protects the company and other founders if one co-founder leaves early, since their unvested shares can be reclaimed rather than sitting with someone no longer working on the business, freeing up room in the option pool if a replacement hire is needed.
Example early-stage cap table
| Holder | Shares | % Fully diluted | Vesting |
|---|---|---|---|
| Founder A (CEO) | 550,000 | 55.0% | 4yr / 1yr cliff |
| Founder B (CTO) | 450,000 | 45.0% | 4yr / 1yr cliff |
| Total | 1,000,000 | 100.0% | - |
No option pool exists yet in this example. It is typically created just before the first funding round, once the company knows roughly how much hiring the round will fund.
Common capitalization errors in early stage startups
- Splitting equity informally with no written agreement or board approval
- Issuing shares to an advisor or early contractor without documenting the grant properly
- Forgetting to reserve founder shares under vesting, leaving no recourse if someone leaves early
- Not tracking authorised versus issued share capital, which can cause problems when issuing new shares later
What founders ask before their first pool
- Do founders really need vesting on their own shares?
- Most experienced investors expect it, and it protects the remaining founders if a co-founder leaves early with a large stake already fully owned.
- When should a company create its first option pool?
- Typically shortly before the first priced funding round, sized to cover expected hiring over the next 12 to 18 months.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.