Why equity is a currency to spend carefully, how vesting works, and an alternative to handing over shares at all.

Bringing on a co-founder is often the right call. A solo founder is only good at what they’re good at, and a startup usually needs skills the founder doesn’t have, especially technical ones.

We asked Stephen Pessenbacher, a corporate and commercial attorney at Dommisse Attorneys who advises founders on raises and cap tables, how co-founders should split their equity…

Stephen’s advice is to split equity fairly, but attach conditions to it. Without them, a co-founder can take their shares and leave 2 years later, which he says leaves the remaining founders in a very sore position. Investors care about this too, because they’re backing the people.

“You are the key reason investors want to invest.”

Stephen calls equity a finite currency: you’ll need it later to raise money and hire people. Every share you hand out now is one you can’t use for those. Before agreeing any split, ask what your runway looks like over the next 2 to 4 years, and how much equity you can really afford to give up.

At pre-seed, keep dilution as low as possible, including between co-founders. For someone joining an existing company as a co-founder because of the value they add, Stephen says 5% to 15% is a usual benchmark at that stage. Investors also worry about founders who end up with very little, because a founder with a small stake can lose motivation.

Stephen recommends a vesting schedule so co-founders earn their shares over time instead of owning them outright from day one. The common market standard is 4 years with a 1-year cliff: nothing vests in the first year, a quarter vests at the 1-year mark, and the rest builds up monthly after that. If a co-founder leaves early, the unvested shares come back to the company.

Decide in writing how a departure is treated. Shareholders’ agreements usually separate good leavers, such as someone leaving for health reasons, from bad leavers, such as someone leaving after misconduct, and set what each is paid for their shares. In South Africa, these terms need to line up across the vesting agreement, the shareholders’ agreement and the company’s Memorandum of Incorporation, so get them drafted properly.

Not everyone who adds value needs to become a shareholder. Stephen calls a profit share an incredibly useful mechanism: in effect, royalties on a product rather than ownership of the company. It rewards the person fairly and keeps your cap table cleaner, because they aren’t an equity holder in the business itself.

A fair split with vesting and clear leaver terms keeps everyone motivated and protects the company if things change. It also gives investors a cap table they can back, because the people they’re investing in still own enough to care.

This is one piece of How Much Equity Should You Give Away and When?, Stephen’s full masterclass inside the Founder Collab, which answers the question every founder asks and few can pin down:

You’ll also get access to 40+ other masterclasses from SA founders and operators on sales, fundraising, UX, paid media and more inside The Founder Collab.

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