Mumbai | 04 Oct, 2018 (9 months, 2 weeks ago)

Contracts and Legal Documentation

How much equity should I divide between co-founders playing different roles?

I had an idea and approached a friend. He advised me to make the product more technical and since one year both of us have been preparing the product. Now the product is ready. He recently told me he would not be coming back from Germany now. Now that the product is ready its all upto me to find funding, execute, expand and everything from now on. His job would be limited to product refinement and upgradation if required and would be further zero after we hire a tech team. We are discussing how much equity should we both share? As he developed the product and has stepped aside. Should he be given equal equity as me who will life long be working on the project?
Answers
08 Oct, 2018 | 16:44

Hi,
The situation you have described is a common occurrence among startups these days. As has been specified, there is no legal requirement for you to provide equal equity to your co-founder and what you provide him is completely dependent on negotiations and the familiarity between you two. However, do note that a lot of start-ups have faced issues, including funding issues, if the founders are not absolutely or completely involved in the start-up but have a significant equity stake (and therefore, control) in the start-up. Given that you would be taking on the lion’s share of the work, you should consider entering into a founder’s agreement and after incorporating a company, you could consider vesting certain shares to your co-founder depending on his involvement in the company, and such vesting can be for a limited notional amount and quantity of shares. Absent a vesting schedule, there may be a likelihood that a non-working co-founder may jeopardize the growth of the company. Thus, a vesting schedule ensures continued dedication and involvement with the start-up without a significant downside. The contours of the agreements, the commercials and procedures can all be subject to negotiation between you and your co-founder.


Mini Raman
04 Oct, 2018 | 14:43

There is no legal requirement as to how much equity you should give your friend. In order to incorporate a company you would need two shareholders but that can be achieved through your spouse/ other relatives/ friends. As to how much equity you should both hold is an item which you should negotiate with your co founder. In the event that you think he will not be involved in the project you can offer him a 10%-20% stake. However please ensure that all the intellectual property in the product vests with you. You may need an IP assignment from him. This requirement varies from case to case.


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