Startup Equity 101: How to Structure Founder and Employee Shares

So, you’ve got a brilliant startup idea, maybe even a co-founder or two, and now you’re staring at the daunting task of figuring out how to split equity. Who gets what? How do you keep employees incentivized? And what happens if someone leaves?

Welcome to Gildre’s Startup Equity 101 guide — where we break down the essentials in a way that makes sense, without the legal jargon and headaches.

Step 1: Understanding Founder Equity Splits

The early days of a startup are thrilling, but they can also be a minefield when it comes to dividing ownership. Many founders default to a 50/50 split, but that’s not always the best approach. Here’s what you should consider:

1. Contribution & Roles

• Who came up with the idea?

• Who is putting in the most time and effort?

• Who is bringing in the initial funding or early customers?

• Who has the skills that are hardest to replace?

Equity should reflect actual contributions rather than an arbitrary even split. A common framework is the Slicing Pie model, where shares are allocated based on risk and contributions over time.

The Slicing Pie model is a dynamic equity split framework designed to ensure fairness as contributions evolve. Instead of setting fixed percentages upfront, each participant earns equity based on what they contribute—whether it’s time, money, intellectual property, or resources. The model works as follows:

• Each contribution is assigned a value (e.g., cash gets a higher weight than unpaid work).

• A participant’s share of equity is calculated dynamically in proportion to total contributions.

• If someone stops contributing, their equity stops growing.

This model prevents founders from over-allocating equity too soon and allows adjustments as the startup progresses.

2. Vesting Schedules

Even among founders, vesting is non-negotiable. A standard 4-year vesting schedule with a 1-year cliff ensures that if someone leaves early, they don’t walk away with a big chunk of equity. Without vesting, a co-founder could disappear six months in and still own a significant stake, which can scare off future investors.

3. Handling Departures & Founder Breakups

Set expectations early for what happens if a founder leaves. Will they keep vested shares? Do they have to sell them back to the company? Having a founders’ agreement in place prevents ugly disputes down the road.

Step 2: Employee Equity & Stock Options

Your startup is only as good as the team you build, and equity is a powerful tool to attract and retain top talent. But how do you structure it fairly?

1. The Employee Option Pool

Before raising capital, startups typically allocate 10-20% of total shares to an employee stock option pool (ESOP). This ensures you have enough equity to recruit key hires without constantly diluting existing shares.

2. How Much Equity to Give Employees

The amount of equity an employee receives depends on their role and seniority. Here’s a rough breakdown:

Role versus Typical Equity %

CEO (non-founder): 5-10%

CTO/VP of Engineering: 1-5%

Senior Engineer: 0.5-2%

Early Employees (first 10 hires): 0.5-2%

Later Employees: 0.1-0.5%

These percentages will shrink as your company grows, so early employees take on more risk but get bigger rewards.

3. Vesting & Cliffs for Employees

Just like founders, employees should have a 4-year vesting schedule with a 1-year cliff. This means if they leave before one year, they don’t get any equity. After that, they earn their shares gradually over four years.

Some startups also introduce performance-based vesting for key hires—meaning they vest shares as they hit specific milestones.

In other words, an employee’s equity is tied to measurable goals instead of (or in addition to) a time schedule. For example:

• A sales executive might vest shares only after closing a certain amount of revenue.

• A product lead could earn equity based on launching a key feature.

• A CTO might vest additional shares after hiring and managing a full engineering team.

This method aligns incentives with company goals, ensuring that equity rewards are directly tied to an employee’s contributions. However, setting clear and achievable milestones is crucial to avoid disputes.

Step 3: Dealing with Investors & Dilution

Once you start raising money, your equity structure will change. Investors will take a portion of your company in exchange for funding, which dilutes existing ownership.

1. Common vs. Preferred Shares

• Common shares: Given to founders, employees, and early advisors. These are standard shares with voting rights but no special privileges.

• Preferred shares: Given to investors, typically with perks like liquidation preferences, which ensure they get paid first if the company is sold.

2. How Dilution Works

Imagine your startup starts with:

• Founder A: 50%

• Founder B: 50%

You then raise $1M from investors, giving away 20% of your company. After the round, your new cap table might look like this:

• Founder A: 40%

• Founder B: 40%

• Investors: 20%

The bigger your funding rounds, the more dilution you’ll experience, but that’s the trade-off for growth capital.

Step 4: Managing Equity for Future Growth

1. Refreshing the Employee Option Pool

As your team grows, you’ll need to issue new equity grants. Many startups do equity refreshers every 2-3 years to keep employees motivated.

2. Handling Secondary Sales

Once your startup gains traction, employees and founders may want to sell some shares before an IPO or exit. Secondary sales let them cash out while keeping enough ownership to stay invested in the company’s success.

3. Equity & Exit Scenarios

If your startup is acquired or goes public, equity holders get paid out based on their ownership and the deal structure. Be mindful of terms like liquidation preferences—they dictate how much investors get before anyone else sees a payout.

Final Thoughts: Get It Right from Day One

Equity is one of the most important decisions you’ll make as a founder. If structured poorly, it can lead to disputes, demotivation, or even losing control of your company.

The key takeaways:

• Be thoughtful about how you split founder equity based on contributions.

• Implement vesting schedules for everyone (founders and employees).

• Allocate 10-20% to an employee option pool to attract great talent.

• Understand how fundraising affects dilution and ownership.

It’s always a good idea to consult a startup lawyer or use equity tools like Carta, Pulley, or Capbase to manage shares properly.