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Founder equity is the stock founders receive when a company is formed, along with the vesting, transfer and IP terms that come with it. The time to set it up is at formation, before the company has value, before investors arrive and before anyone leaves.
We document founder equity for startups and founders. Gaps in this paperwork are a frequent diligence issue, and they cost more to fix as the company's value rises. For choosing the entity, see business entity formation.
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What We Set Up
Founder Stock Purchase Agreements
Each founder buys shares at a stated price, paid in cash, assigned technology or both.
Vesting and Acceleration
The company's right to buy back unvested shares, with any acceleration on a sale spelled out.
IP Assignment
Founders assign their work for the business to the company, including work done before formation.
Initial Cap Table
Authorized shares, founder issuances and room for an option pool, matching the board's approvals.
Vesting Schedules
Vesting gives the company the right to buy back a founder's unvested shares if the founder leaves. Many schedules start with a cliff, an initial period in which nothing vests, after which a portion vests at once and the rest vests in installments. No law requires a particular schedule. Founders who worked on the business before formation sometimes get credit for that time, and investors in a priced round may ask founders to restart vesting.
The 83(b) Election
With an 83(b) election, a founder with vesting shares can choose to be taxed when the shares are issued rather than as they vest. The election must be filed with the IRS promptly after the shares are transferred; the deadline is short and can't be extended. The IRS has a standard form for it, and a copy goes to the company. Whether to file is a tax decision for each founder and their CPA, and we work with them on it.
Setting Up the Cap Table
At formation, the company authorizes more shares than it issues, leaving room for an option pool and future investors. Founder shares are issued with board approval, recorded in the stock ledger and shown in a cap table that matches the signed documents. Grants to advisors and early employees come later through an equity plan; see equity compensation.
How Founder Equity Gets Set Up
Agree on the Split
We talk through each founder's percentage, role and vesting before anything is signed.
Form the Company
Often a Delaware corporation if the company plans to raise venture capital.
Issue Founder Shares
Each founder signs a stock purchase agreement with vesting terms and an assignment of prior work.
83(b) Elections
Founders decide with their CPAs whether to file, and any election goes in promptly, since the deadline is short.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWhat is the difference between single-trigger and double-trigger acceleration?
Single-trigger acceleration vests some or all of a founder's unvested shares when the company is sold. Double-trigger acceleration needs a second event, usually the founder's termination without cause or resignation for good reason within a set period after the sale. Investors and buyers generally prefer double trigger, because single trigger can leave a buyer with founders who have little reason to stay.
What happens to a founder's shares when the founder leaves?
Under a typical founder stock purchase agreement, the company can buy back the unvested shares, often at the lower of the founder's original price and their current fair market value, and the founder keeps the vested shares subject to transfer restrictions. Without vesting, a founder who leaves in the first year can keep a full stake.
Should a founder assign code or ideas created before the company was formed?
Yes, if the product depends on them. Work a founder created before formation belongs to the founder unless it is assigned, and investors check for the assignment. A founder who built the work while employed elsewhere should also confirm the former employer has no claim to it.
When should founders sign their equity agreements?
As soon as the company is formed, when founders can buy shares for a nominal price and settle ownership, vesting and IP while they still agree. Informal arrangements fixed later often need amendments, ratifications and a review by the founders' CPAs.
More in Startups, Entity Formation, and Venture Capital
- Startups and Venture CapitalFormation, founder equity and fundraising for emerging companies.Learn More
- SAFEs and Convertible NotesEarly-stage financings that turn into equity at the next priced round.Learn More
- Priced Equity RoundsSeries Seed and Series A preferred stock rounds, on the company side.Learn More
- Securities ComplianceExemptions, offering documents and filings for private capital raises.Learn More
- Equity CompensationOption plans, restricted stock and profits interests for employees and advisors.Learn More
- Business Entity FormationChoosing and forming the right entity, with documents that fit the owners.Learn More
- Operating Agreements and Formation DocumentsCompany agreements, partnership agreements and shareholder agreements.Learn More
- Entity ConversionsChanging entity type or home state without starting a new company.Learn More
- Shareholder and Buy-Sell AgreementsTransfer limits, buyout triggers and pricing terms the owners agree on in advance.Learn More
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