Smart Equity Splits: The Definitive Guide to Allocating Shares for Startups

Smart Equity Splits: How to Allocate Startup Shares

A reader wrote in to ask business advice on how to structure startup shares.  The composes of two larger-contributing founders, one less-contributing founder, and a strategic investor—here’s a simple way to structure ownership that aligns incentives and supports growth.

Core Principles

• Keep primary founders meaningfully incentivized and roughly balanced.
• Give the secondary founder a real stake without over-allocating.
• Plan an option pool of 10–20% based on your hiring roadmap.
• Use vesting for all founder and employee equity (4 years with a 1-year cliff is common).
• Treat strategic investor equity as investment-based (cash or tangible value), not from the founder pool.

Common Allocation Frameworks (Pre-Investment)

Scenario A: Balanced Primaries, Modest Secondary, Standard Option Pool

• Primary Founder A: 32–36%
• Primary Founder B: 32–36%
• Secondary Founder: 8–12%
• Option Pool: 15–20%
• Strategic Investor (advisory/non-cash): 3–8% with vesting and milestones

Use when the investor provides strategic value (distribution, IP access, regulatory support) rather than significant capital.

Scenario B: Investor Brings Capital at Seed (Pool Created Pre-Money)

• Founders combined: 70–80%
  • Primary A: 28–34%
  • Primary B: 28–34%
  • Secondary: 6–12%
• Option Pool: 10–20% (pre-money)
• Investor: 10–20% (depends on cash and valuation)

Typical seed where investors target 10–20% ownership via SAFE/note/equity; everyone dilutes proportionally.

Scenario C: Strongly Differentiated Contribution

• Primary A: 38–42%
• Primary B: 25–30%
• Secondary: 5–8%
• Option Pool: 15–20%
• Strategic Investor (advisory): 3–7%

Use when one founder clearly drives core IP, product, or CEO responsibilities and bears outsized risk.

Choosing the Exact Numbers

• Role and irreplaceability: Heavier allocations to CEO/product/IP owner.
• Time and risk: Full-time now vs later; personal cash invested.
• Hiring needs: If 3–6 key hires in 18 months, target a 15–20% option pool.
• Investor contribution: Cash with valuation usually 10–20% post-money; pure strategic access 2–5% with milestones.

Implementation Basics

• Vesting: 4 years, 1-year cliff; consider double-trigger acceleration for change of control.
• Founder equity: Often issued as restricted stock; file an 83(b) election within 30 days.
• Legal hygiene: IP assignment agreements and clear role definitions from day one.
• Strategic/advisory equity: Use milestone-based tranches tied to measurable outcomes.

Option Pool Planning

Size the pool to match hiring, not arbitrary targets. Examples:

• Head of Engineering: 1–2%
• Head of Sales: 0.5–1%
• Senior Engineers: 0.1–0.3% each
• Design/PM/Marketing leads: 0.2–0.8% depending on impact

Example Cap Tables

Example 1: Advisory Investor, Strong Primaries

• Primary A: 35%
• Primary B: 33%
• Secondary: 7%
• Strategic Investor (advisory, vested): 5%
• Option Pool: 20%

Total: 100%.

Example 2: Seed Investment with Valuation

Pre-money:

• Founders combined: 80% (A 32%, B 32%, C 16%)
• Option Pool: 20%

Post-money (investor targets 15%):

• A ~27.2%
• B ~27.2%
• C ~13.6%
• Option Pool ~17%
• Investor 15%

Final Tips

• Avoid advisor grants above ~5% unless extraordinary and milestone-based.
• Tie secondary founder equity to vesting and, if needed, performance milestones.
• Align titles and responsibilities with equity to reduce future conflict.
• Model dilution for two rounds ahead so everyone knows likely outcomes.

Want a Tailored Plan?

Let me know what you think in the comments, share each founder’s role and time commitment, your investor’s contribution (cash or strategic), and your 12–18 month hiring plan, and we can draft a custom allocation with vesting and milestone terms.