Shares and the split
A private limited company is owned through shares. A founder who holds 40 of every 100 shares owns 40% of the company. Ordinarily that also means 40% of the votes at shareholders' meetings and 40% of what the shareholders receive if the company is sold, unless the shares or an agreement give different rights.
How you split the shares between founders is yours to decide. A split that reflects what each person will put in from here (time, skills, money, what they give up), and not only whose idea it was, tends to hold up better when things get hard.
Vesting
Vesting means a founder earns their shares over time instead of all at once. If a founder leaves early, the shares they have not yet earned go back, so the people who stay are not left working for someone who left.
A common pattern is four years with a one-year cliff: nothing is earned during the first year, a quarter is earned on the first anniversary, and the rest is earned month by month over the next three years. Shorter schedules and no cliff are also used; what matters is that every founder agrees it.
Founders usually receive their shares when the company is formed. So in practice, founder vesting is usually written into the shareholders' agreement as a right for the company or the other founders to buy back the shares a founder has not yet earned if they leave. A lawyer drafts how that works for your company.
- Example: a founder holds 30,000 shares on four-year vesting with a one-year cliff, and leaves after 18 months.
- They have earned 18 of 48 months, so 11,250 shares.
- The other 18,750 shares can be bought back on the terms the agreement sets.
- Had they left after 10 months, before the cliff, they would have earned none.
Good and bad leavers
Agreements often treat a founder who leaves differently depending on why. A good leaver (for example, someone who leaves in good standing after the cliff) keeps the shares they have earned. A bad leaver (for example, someone dismissed for serious misconduct) may have to sell even their earned shares back, often at a low price. The definitions, and the price, are for you to agree and a lawyer to draft.
The option pool
An option pool is a slice of the company set aside for future team members. An employee given options can buy shares later at a price fixed when the options are granted, usually after their own vesting period. Options give early employees a stake in what they help build.
In India a company's employee stock option plan (ESOP) has to be approved by its shareholders and follow the rules for its type of company, and options are taxed in ways that depend on when they are exercised and when the shares are sold. Set the plan up with a lawyer and a chartered accountant before you promise anyone options.
The founders' agreement tool sets a pool aside before the founders' split; you choose its size.
Dilution
When the company issues new shares, to an investor or into the option pool, everyone else's percentage goes down even though they hold the same number of shares. That is dilution. Whether it leaves a founder better or worse off depends on what the company is worth afterwards.
Talk about it early
Have the conversation about the split, vesting and leaving while everyone is still friendly. Write down what you agree, sign it, and take it to a lawyer to turn into a shareholders' agreement. Revisit it when someone's commitment changes.