Equity for founders and early investors: how to structure it legally

Equity for founders and early investors: how to structure it legally

When launching a start-up, one of the most sensitive and fundamental issues is how to allocate equity between founders and early-stage investors. This division, known as equity, can make the difference between a healthy and aligned relationship or a conflict that is difficult to manage. It also directly influences the ability to attract external investment and build a solid, scalable structure from the outset.

Equity represents each person’s share in the company. In other words, it defines who owns what part of the business and what economic return they will receive if the company is successful. It also determines the weight in strategic decision-making. An ill-conceived distribution can create tensions as the project evolves, especially if one of the partners does not perform as planned or leaves the partnership early.

The distribution among founders should be made on the basis of clear and realistic criteria. The most relevant variables are usually the initial contribution of each partner, both in terms of capital and work; the level of current and future commitment; the functions that each partner will assume in the development of the business; and the key skills or assets that they bring to the team. Although many start-ups opt for an equal distribution to avoid friction, it is advisable to objectively analyse each case and find a fair balance between effort, risk and value contributed.

To protect the project in the long term, it is advisable for the founders’ shares to be subject to a vesting scheme. This legal figure allows each partner to acquire his or her equity progressively over a given period, usually four years, with an initial trial period, known as Cliff, which is usually one year. In this way, if a founder decides to leave the project early, he or she only takes the proportional part he or she has consolidated, and the rest can be redistributed or reserved to attract new talent. Vesting is a protective measure for both the company and the partners who remain committed to the development of the business.

When the start-up begins to attract its first investors, it is essential to have a clear vision of the shareholder structure. The objective is to allow capital inflows without compromising the balance between the founding partners or hindering future rounds. At this stage, it is important to define the percentage of dilution that the founders are willing to assume, to carefully negotiate the rights granted to new investors, and to provide room for the creation of an incentive plan for key employees, such as a stock option programme.

To manage this whole process safely and professionally, there are two fundamental legal tools: the cap table and the shareholders’ agreement. The cap table is the document that lists who the partners of the company are, how many shares each one has, what type of shares they are and what percentage they represent. It is a living document that must be kept up to date as the structure of the company evolves.

The shareholders’ agreement, on the other hand, establishes the rules of the game between the different members of the project. It defines key issues such as decision-making, restrictions on the sale of shares, dragging and tagging rights, conflict resolution, and scenarios for the voluntary or forced departure of a partner. Having a well-drafted agreement brings clarity and stability to the relationship between the partners, and conveys confidence to future investors.

Structuring equity well from the outset is not just a question of percentage distribution. It is a way of protecting the vision of the project, reinforcing the cohesion of the team and facilitating its growth over time. It is a strategic investment in the legal and operational health of the startup.