4. Co-Founder Equity Splits and Vesting¶

4.1 Executive Summary¶

• Equal 50-50 splits are common but often inappropriate—founders should split equity based on relative contributions including idea origination (5-10%), domain expertise (10-20%), execution capability (20-30%), capital contribution (10-30%), and opportunity cost (10-20%)
• The Slicing Pie model uses dynamic equity allocation based on actual contributions measured in "slices," with multipliers for cash (1x), time at below-market salary (2x), and expenses (1x), recalculating ownership quarterly as contributions accumulate
• Vesting schedules (standard: 4 years with 1-year cliff) prevent free-rider problems where early-departing founders retain full equity while remaining founders build all the value—without vesting, a co-founder leaving after 6 months keeps 40% ownership
• Cliff periods (typically 12 months) create binary outcomes: founders departing before the cliff forfeit all unvested shares, protecting remaining founders from dilution by non-contributors while giving everyone meaningful trial period
• Acceleration provisions (single-trigger for termination without cause, double-trigger for acquisition + termination) protect founders from losing unvested equity in adverse scenarios but must be negotiated carefully to avoid investor resistance

4.2 Why Equity Splits Matter¶

The co-founder equity split shapes every future negotiation, determines who has control during disagreements, affects investor perception of team dynamics, and ultimately determines financial outcomes at exit. A 60-40 split means the majority founder makes final decisions and captures 50% more value than the minority founder at exit. A $100 million exit with 20% remaining founder ownership means $12 million for the 60% founder versus $8 million for the 40% founder—$4 million difference originating from day-one equity split.

Yet founders often make this critical decision casually, defaulting to equal splits without rigorous analysis of relative contributions. Research shows that 31% of failed startups cite co-founder conflicts as a primary failure cause. Many of these conflicts trace back to misaligned equity splits that created resentment when contributions diverged from ownership percentages.

This chapter provides frameworks for determining fair equity splits, implementing vesting schedules that protect all parties, and documenting agreements before conflicts arise.

4.3 Frameworks for Determining Equity Splits¶

The Equal Split (50-50 or 33-33-33)¶

Rationale: Equal splits signal partnership, trust, and shared commitment. They simplify decision-making and avoid contentious negotiations at the fragile early stage.

When It Works:

• Founders have genuinely equal skills, networks, and domain expertise
• All founders commit full-time from day one with similar opportunity costs
• Team has worked together previously and trusts each other implicitly
• Founders prioritize speed to launch over precise fairness calculations

When It Fails:

• One founder contributes idea, domain expertise, and network while other provides technical execution only
• Founders have different opportunity costs ($200K salary foregone vs $80K)
• One founder plans to work part-time initially while other goes full-time
• Founders have unequal financial contributions ($100K vs $0)

Statistics: Y Combinator data suggests 40% of YC batches use equal splits, but companies with unequal splits (60-40, 55-30-15) outperform equal-split companies by 15-20% in long-term success rates. This may reflect that unequal splits indicate thoughtful analysis and clear role delineation rather than avoidance of difficult conversations.

The Contribution-Based Model¶

This framework assigns equity based on quantifiable contributions across five dimensions:

1. Idea Origination (5-10% premium)

• Who conceived the core business model?
• Who identified the market opportunity?
• Who developed the initial product vision?

Reality check: Ideas without execution have near-zero value. Overweighting idea origination creates resentment. Cap this premium at 10%.

2. Domain Expertise (10-20% premium)

• Who has industry relationships and distribution channels?
• Who understands customer needs from prior experience?
• Who has technical expertise others lack?

Example: Healthcare SaaS co-founded by doctor (domain) + engineer (technical). Doctor's domain expertise might warrant 55-45 split if critical to product-market fit and sales.

3. Execution Capability (20-30% premium)

• Who has the execution track record?
• Who will be CEO driving fundraising, hiring, and strategy?
• Who has prior founder/leadership experience?

Example: Second-time founder (successful $20M exit) teaming with first-time founder might take 60% to reflect higher likelihood of success due to experience.

4. Capital Contribution (10-30% premium)

• Who is funding initial development?
• What's the cash value of contributed assets (code, IP, equipment)?
• Are contributions actual investment or loans?

Formula:

Capital Equity % = Capital Contribution / (Valuation + Capital Contribution)

If startup valued at $0 (inception) and Founder A contributes $100K:
Founder A Capital Equity = $100K / ($0 + $100K) = 100% of capital claim

If Founder A contributes $100K and Founder B contributes $0, but total sweat equity worth $400K:
Founder A Total Equity = ($100K capital / $500K total) + (Founder A sweat / $400K sweat × 80%)

5. Opportunity Cost (10-20% premium)

• What salary is each founder foregoing?
• What career momentum is being sacrificed?
• What's the relative risk for each founder?

Example:

• Founder A: $250K/year Google PM, age 28, high career trajectory
• Founder B: $100K/year mid-career consultant, age 38, lower career trajectory
• Founder A's opportunity cost is 2.5x higher + has more runway to recover

Might justify 55-45 or 60-40 split favoring Founder A.

The Slicing Pie Model (Dynamic Equity Split)¶

Created by Mike Moyer, the Slicing Pie model treats equity as a dynamic pie that grows as founders contribute, with ownership recalculated based on accumulated contributions.

Core Mechanics:

1. Establish Multipliers:

2. Cash contributions: 1x multiplier

3. Time at below-market rate: 2x multiplier
4. Expenses paid personally: 1x multiplier

5. Equipment/IP contributed: 1x multiplier (fair market value)

6. Calculate Slices:

Founder A Monthly Contribution:
- Time: 160 hours × $100/hour market rate = $16,000 × 2 (multiplier) = 32,000 slices
- Cash: $5,000 invested × 1 (multiplier) = 5,000 slices
- Expenses: $1,000 (laptop) × 1 (multiplier) = 1,000 slices
Total: 38,000 slices

Founder B Monthly Contribution:
- Time: 160 hours × $80/hour market rate = $12,800 × 2 (multiplier) = 25,600 slices
- Cash: $0 × 1 = 0 slices
Total: 25,600 slices

Month 1 Ownership:
Total slices = 38,000 + 25,600 = 63,600
Founder A: 38,000 / 63,600 = 59.7%
Founder B: 25,600 / 63,600 = 40.3%

1. Recalculate Quarterly: As contributions accumulate, recalculate ownership. If Founder B contributes more in Months 2-3, their ownership increases.

2. Freeze at Funding Event: When institutional funding closes, freeze dynamic allocation and convert to fixed ownership percentages.

Advantages:

• Fair to founders who contribute disproportionately early
• Reduces conflict by tying equity to measurable contributions
• Accommodates part-time founders transitioning to full-time
• Provides clear framework for adding late co-founders

Disadvantages:

• Complex tracking and calculation overhead
• Requires agreement on market rates for time and assets
• Investors dislike dynamic equity (prefer fixed cap table)
• Can create uncertainty affecting morale

Practical Use: Best for pre-incorporation phase or first 6-12 months with 2-3 co-founders. Freeze at first funding or incorporation, whichever comes first.

The Founder's Pie Calculator¶

Online calculators (e.g., Gust's Founder Equity Calculator, Co-Founders' Equity Calculator) implement contribution-based models by asking founders to weight factors including:

• Idea origination (0-10%)
• Business plan execution (0-20%)
• Domain expertise (0-20%)
• Commitment and risk (0-30%)
• Capital investment (0-30%)

Example Calculation:

Founder A (Technical Co-Founder):

• Idea: 30% credit
• Business plan: 40% credit
• Domain expertise (technical): 60% credit
• Commitment: 50% (full-time from day 1)
• Capital: $50K of $100K total

Founder B (Business Co-Founder):

• Idea: 70% credit
• Business plan: 60% credit
• Domain expertise (industry): 40% credit
• Commitment: 50% (full-time from day 1)
• Capital: $50K of $100K total

Weighted result: Founder A 48%, Founder B 52%

Advantage: Structured framework reduces emotional negotiation. Disadvantage: Weights are subjective; founders may game inputs to achieve desired split.

4.4 Vesting: Protecting Against Free Riders¶

The Problem Vesting Solves¶

Without vesting, a co-founder who departs after 6 months retains 33% ownership despite remaining founders building 100% of the value over subsequent 5 years. This creates three problems:

1. Free Rider Problem: Departed founder enjoys exit proceeds without contributing to the outcome
2. Dilution Problem: Remaining founders' shares dilute in future funding rounds while departed founder's shares dilute equally (departed founder maintains 33% even though contribution was 5% of total effort)
3. Investor Problem: VCs refuse to invest when departed founders hold substantial ownership without ongoing contribution

Real Example: Startup incorporated with three equal co-founders (33% each), no vesting. Co-founder C leaves after 8 months due to personal reasons. Company raises Series A 18 months later, goes on to $80M acquisition 5 years after founding. Co-founder C receives $26.7M (33% × $80M), despite contributing only 8 months of 60 total founder-months (13% of effort). Remaining founders A and B split $53.3M (66% × $80M), each receiving $26.7M despite contributing 76% (26 months each) of effort.

With 4-year vesting, Co-founder C would have vested 8/48 months = 16.7% of their 33% = 5.5% total ownership, receiving $4.4M instead of $26.7M. The $22.3M difference would be redistributed to A and B.

Standard Vesting Schedule: 4 Years with 1-Year Cliff¶

The venture capital industry standard is:

• Total vesting period: 4 years
• Cliff period: 1 year (12 months)
• Vesting frequency: Monthly after cliff

Mechanics:

Day 0: Co-founder granted 1,000,000 shares, subject to vesting
Month 0-11: 0 shares vested (cliff period)
Month 12: 250,000 shares vest (25% cliff vesting)
Month 13: 20,833 shares vest (1/48 of total)
Month 14: 20,833 shares vest
...
Month 48: Final 20,833 shares vest
Total vested after 48 months: 1,000,000 shares

Cliff Purpose: Provides 12-month trial period. If co-founder isn't working out, company can part ways before significant equity vests. Without cliff, founders vest 1/48 per month from day 1, meaning 25% vests over 12 months even if departure occurs at month 6.

Mathematical Difference:

Without cliff:

• Founder departs month 9
• Vested: 9/48 × 1,000,000 = 187,500 shares (18.75%)

With 1-year cliff:

• Founder departs month 9 (before cliff)
• Vested: 0 shares (0%)

The 187,500 shares (18.75% difference) get repurchased by company or remaining founders at nominal value (often $0.0001/share), returning them to the pool.

Variations: Shorter/Longer Vesting and Cliff Periods¶

3-Year Vesting (Rare):

• Used when founders have prior relationship and high confidence
• Accelerates ownership, higher risk if founder departs year 2-3
• Still typically includes 1-year cliff

5-Year Vesting (Rare):

• Used when investor concern about founder retention is extreme
• Penalizes founders who successfully build business and want to exit
• May signal investor lack of confidence in founders

6-Month Cliff (Rare):

• Shortens trial period, benefiting founders
• Increases risk to company if poor fit discovered months 7-12

18-Month Cliff (Uncommon):

• Extends trial period, benefiting company/remaining founders
• Demoralizing for founders (no equity for 1.5 years)
• Typically only for later-joining co-founders, not original founders

Market Standard: Stick with 4 years + 1 year cliff unless compelling reason for deviation. Investors are accustomed to this structure and deviations require explanation.

Acceleration Provisions: Single vs Double Trigger¶

Single-Trigger Acceleration: Vesting accelerates upon single event (e.g., acquisition)

Example:

• Founder has 1,000,000 shares with 4-year vesting
• After 2 years, 500,000 shares vested
• Company acquired → All remaining 500,000 shares immediately vest
• Founder owns 100% of 1,000,000 shares at acquisition close

Double-Trigger Acceleration: Vesting accelerates only if TWO events occur:

1. Change of control (acquisition), AND
2. Termination without cause or constructive termination within specific period (typically 12 months post-acquisition)

Example:

• Founder has 1,000,000 shares with 4-year vesting
• After 2 years, 500,000 shares vested
• Company acquired (Trigger 1) → No immediate acceleration
• Founder remains employed → Vesting continues monthly
• Month 30: Acquirer terminates founder without cause (Trigger 2) → Remaining 500,000 shares immediately vest

Founder Perspective on Acceleration:

Favor Single-Trigger Because:

• Acquisition often followed by acquirer replacing founders
• New management may create hostile environment (constructive termination)
• Single-trigger ensures founder captures acquisition value even if terminated day 1
• Leveling mechanism in exit negotiations

Investors Resist Single-Trigger Because:

• Acquirer concerned about retention post-acquisition
• If all founders' equity accelerates, founders can leave immediately post-close
• Reduces acquisition price (acquirer discounts for retention risk)
• Double-trigger aligns founders to stay and support integration

Market Standard: Double-trigger acceleration for founders, single-trigger acceleration for employees (in acquisition scenarios). Founders are key to integration success, so acquirers want retention incentive. Employees less critical individually, so acceleration helps acquirer avoid retention issues.

Negotiation Tip: Request double-trigger for "termination without cause OR constructive termination," with constructive termination defined to include:

• Material reduction in role, responsibilities, or compensation
• Relocation requirement >50 miles
• Material breach of employment agreement by company

This protects founders from acquirer creating hostile conditions to avoid triggering acceleration.

Implementing Vesting: Stock Grants vs Restricted Stock¶

Method 1: Restricted Stock Purchase Agreement (Founder Stock)

Founders purchase shares at incorporation (typically $0.0001/share) subject to repurchase right at original price.

Mechanics:

Day 0: Founder purchases 1,000,000 shares for $100 ($0.0001/share)
       Company has right to repurchase unvested shares at $0.0001/share if founder departs
Month 12: 250,000 shares vest (repurchase right lapses on these shares)
Month 13: 20,833 shares vest
...
Month 48: All shares vested, no repurchase right remains

Advantages:

• Founder is legal owner from day 1
• Tax clock starts at purchase (83(b) election)
• Dividends and voting rights from day 1

Disadvantages:

• Founder must pay purchase price upfront (though nominal)
• Tracking unvested vs vested shares for each founder
• Legal complexity if founder departs (repurchase must be executed)

Tax Consideration: Founder files 83(b) election within 30 days of purchase, electing to be taxed on spread (typically $0) at purchase rather than at vesting. This starts long-term capital gains holding period from purchase date.

Method 2: Stock Option Grant (Less Common for Founders)

Company grants options to purchase shares, vesting over time.

Mechanics:

Day 0: Founder granted options to purchase 1,000,000 shares at $0.0001/share
Month 0-11: 0 options vest
Month 12: 250,000 options vest (founder can exercise to buy 250,000 shares for $25)
...
Month 48: All options vested

Advantages:

• Simpler administration (no repurchase)
• No upfront payment required

Disadvantages:

• Founder doesn't own shares until exercise
• Tax clock doesn't start until exercise
• No dividends or voting rights until exercise
• Exercise cost increases as valuation increases

Verdict: Restricted stock with 83(b) election is standard for founders. Options are standard for employees.

4.5 Case Studies¶

Case Study 1: WhatsApp (50-50 Split Success)¶

Context: Jan Koum and Brian Acton co-founded WhatsApp in 2009 with 50-50 equity split. Both were ex-Yahoo engineers with similar backgrounds, skills, and opportunity costs.

Why Equal Split Worked:

• Genuinely equal contributions: Koum (product/vision), Acton (engineering/infrastructure)
• Both full-time from day 1
• Both invested personal funds (Acton: $250K)
• Prior working relationship at Yahoo (mutual respect and trust)
• Clear role delineation (Koum CEO, Acton CTO)

Outcome: Facebook acquired WhatsApp for $19 billion in 2014. Koum and Acton each received ~$3 billion (after dilution from Sequoia investment).

Lessons:

• 50-50 can work with truly equal co-founders
• Prior working relationship reduces execution risk
• Clear roles prevent conflict even with equal ownership
• Equal split signals partnership to investors when justified

Case Study 2: Facebook (Zuckerberg's Control)¶

Context: Mark Zuckerberg initially owned 65% of Facebook at incorporation, with co-founders Eduardo Saverin (30%), Dustin Moskovitz (3%), and Andrew McCollum (2%).

Zuckerberg's Rationale:

• Originator of idea and sole initial builder
• CEO from day 1
• Assumed most execution risk

Saverin Dilution: When Saverin relocated to Brazil (2004) and stopped contributing, Zuckerberg restructured equity to dilute Saverin from 30% to <10%. This led to lawsuit, settled for ~5% ownership (still worth $15+ billion at IPO).

Outcome: Zuckerberg's control (maintained >50% voting power through IPO via dual-class structure) enabled decisive strategy execution without co-founder conflicts.

Lessons:

• Founding CEO should have meaningful control (>50% initially or via voting provisions)
• Vesting protects against non-contributing co-founders (Saverin case)
• Dilution mechanisms (preferred stock issuance) can adjust early equity splits
• Legal disputes damage relationships and create distraction

Case Study 3: Slicing Pie in Action (Anonymous B2B SaaS)¶

Context: Two co-founders (Engineer + Sales) start B2B SaaS. Engineer builds MVP over 6 months part-time while employed, Sales founder joins full-time at launch to drive customer acquisition.

Slicing Pie Implementation:

Months 1-6 (Engineer building MVP):

• Engineer: 60 hours/month × 6 months × $150/hour × 2 (sweat equity multiplier) = 108,000 slices
• Engineer ownership: 100%

Month 7 (Sales joins full-time):

• Engineer: 160 hours × $150/hour × 2 = 48,000 slices
• Sales: 160 hours × $120/hour × 2 = 38,400 slices
• Total slices: 108,000 + 48,000 + 38,400 = 194,400
• Engineer: 156,000 / 194,400 = 80.2%
• Sales: 38,400 / 194,400 = 19.8%

Month 12 (5 months of joint work):

• Engineer cumulative: 108,000 + (48,000 × 6) = 396,000 slices
• Sales cumulative: 38,400 × 6 = 230,400 slices
• Total: 626,400 slices
• Engineer: 396,000 / 626,400 = 63.2%
• Sales: 230,400 / 626,400 = 36.8%

Month 18 (Series A closes, freeze dynamic allocation):

• Final split: Engineer 58%, Sales 42%

Outcome: Sales founder felt initial 20% was unfair given equal workload months 7+, but agreed 42% after 12 months reflected engineer's MVP contribution. Froze at Series A, avoiding ongoing recalculations.

Lessons:

• Slicing Pie accommodates part-time → full-time transitions
• Transparency reduces conflict (both founders agreed on methodology)
• Freeze at funding to avoid perpetual renegotiation
• 58-42 split more appropriate than 50-50 given engineer's upfront contribution

4.6 Action Items¶

1. Calculate Market Rates for Co-Founders: Research market salaries for each co-founder's role (Glassdoor, Levels.fyi, AngelList). Document opportunity cost (foregone salary × vesting period).

2. Use Founder Equity Calculator: Input each founder's contributions into Gust or Co-Founders' Equity Calculator. Run sensitivity analysis (adjust weights) to see how split changes. Discuss results with co-founders.

3. Draft Vesting Agreement Before Incorporation: Create restricted stock purchase agreement with 4-year vesting, 1-year cliff, and double-trigger acceleration. Have all founders sign before filing incorporation papers.

4. File 83(b) Election Within 30 Days: If using restricted stock, founders must file 83(b) election with IRS within 30 days of stock purchase. Failure to file converts favorable capital gains treatment to ordinary income.

5. Document Equity Split Rationale: Write internal memo explaining equity split methodology, assumptions, and edge cases. Store in founder records. This prevents revisionism if conflict arises later.

6. Establish Departure Scenarios: Document what happens if co-founder departs voluntarily, involuntarily, or for cause. Specify repurchase mechanics, valuation methodology (FMV vs nominal), and payment terms.

7. Add Accelerate Provisions: Negotiate double-trigger acceleration for "termination without cause OR constructive termination" with constructive termination clearly defined.

8. Set Up Vesting Tracking System: Use Carta, Pulley, or spreadsheet to track vesting schedule for each founder. Review quarterly to ensure cap table reflects current vested ownership.

9. Establish Repurchase Fund: Set aside budget for repurchasing unvested shares if founder departs. Even if repurchase is at nominal price ($0.0001/share), budget legal and administrative costs.

10. Annual Equity Review: Conduct annual review of equity split with all founders. If contributions diverged significantly from initial split, discuss adjustment mechanisms (bonus equity pool, performance-based vesting acceleration).

4.7 Key Takeaways¶

• Equal splits are mathematically simple but often create resentment when contributions diverge—founders should use contribution-based frameworks (idea, domain, execution, capital, opportunity cost) to determine fair splits, even if uncomfortable
• Vesting with 1-year cliff is non-negotiable protection against free riders—a co-founder departing after 8 months without vesting keeps 33% ownership on company built over subsequent 5 years, while vesting returns unvested shares to pool
• 83(b) election within 30 days of restricted stock purchase is critical tax optimization—electing to be taxed on $0 spread at purchase starts capital gains clock, saving millions in taxes at exit vs ordinary income treatment on vested shares
• Double-trigger acceleration (acquisition + termination) balances founder protection with investor/acquirer retention concerns—negotiate for "termination without cause OR constructive termination" to prevent acquirer gaming the trigger
• Slicing Pie dynamic allocation works for early stage (6-12 months) but must freeze at first funding—perpetual recalculation creates cap table instability that investors will not tolerate

4.8 Red Flags to Watch¶

🔴 CRITICAL: No vesting agreement in place - Every co-founder must have vesting. Investors will not fund companies where departed founders retain significant unvested equity. If no vesting exists, implement immediately or investor will force it.

🔴 CRITICAL: Forgot to file 83(b) election within 30 days - Missing 83(b) deadline means founder pays ordinary income tax (up to 35%+) on vested shares' FMV rather than capital gains (20%) on exit proceeds. On $10M exit, difference is $1.5M+ in extra taxes.

🟡 Co-founder refuses vesting - Founder arguing "I trust my co-founders, we don't need vesting" is either naive or planning to leave early. Vesting protects all parties equally. Refusal signals bad faith.

🟡 Vesting with no cliff - Monthly vesting from day 1 without 12-month cliff means founder departing at month 9 keeps 18.75% ownership. Insist on cliff.

🟡 Unequal vesting schedules - Founder A has 4-year vesting, Founder B has 2-year vesting creates asymmetry. If different schedules exist, must have clear rationale (e.g., later-joining founder has shorter vesting).

⚠️ Single-trigger acceleration without investor consent - Term sheets may prohibit single-trigger acceleration. If you've agreed to single-trigger in founders' agreement but investor requires double-trigger, must renegotiate with co-founders.

⚠️ Informal equity split agreement - Verbal agreement or email confirming 60-40 split is not enforceable. Must be documented in stock purchase agreements and cap table.

⚠️ No buyback provision for departed founders - If founder departs, company should have right (not obligation) to repurchase vested shares at FMV. This prevents departed founder from blocking future funding rounds.

4.9 When to Call a Lawyer¶

Situations REQUIRING lawyer:

• Drafting initial restricted stock purchase agreements with vesting
• Handling founder departure and repurchase of unvested shares
• Dispute over equity split or vesting interpretation
• Implementing equity adjustment mid-journey (dilution, repricing)
• 83(b) election filing (lawyer can file on founder's behalf to ensure compliance)

Situations where lawyer OPTIONAL but RECOMMENDED:

• Using standard vesting templates (Orrick, Cooley, Y Combinator) with no modifications
• Informal equity split discussion before retention of lawyer
• Annual vesting schedule reviews (administrative, not legal)

Typical Costs:

• Founder stock purchase agreements (all co-founders): ₹75,000-₹2 lakh
• 83(b) election filing assistance: ₹10,000-₹25,000 per founder
• Founder departure and repurchase: ₹50,000-₹2 lakh depending on complexity
• Equity dispute resolution: ₹2 lakh-₹10 lakh+ (avoid this scenario)

DIY vs Professional: For straightforward 2-3 founder equal split with standard 4-year vesting + 1-year cliff, templates from Y Combinator or Orrick suffice (with CA review for Indian compliance). For complex situations (unequal splits, late-joining founder, prior IP contribution), engage lawyer.

4.10 Indian Context¶

Companies Act 2013 and Founder Shares¶

Founders typically receive common shares under Section 38 (issue of share capital) rather than preference shares. Key compliance:

• Board resolution authorizing share issuance
• Form PAS-3 filed within 15 days of allotment
• Share certificate issued to founders
• Articles of Association must authorize share issuance

Buyback Provisions: If company wants right to repurchase departed founder's shares, Articles must authorize buyback under Section 68. Private limited companies can buy back up to 10% of paid-up capital + free reserves in any financial year.

Tax Treatment of Restricted Stock and 83(b) Election¶

India does NOT have 83(b) election equivalent. Founders receiving restricted stock face different tax treatment than US:

At Grant/Purchase: No immediate tax if purchased at fair market value At Vesting: No immediate tax (shares already owned) At Sale: Capital gains tax applies

• Holding period calculated from purchase date, not vesting date
• If held >24 months: Long-term capital gains at 20% (or 12.5% without indexation per Budget 2024)
• If held ≤24 months: Short-term capital gains at applicable slab rate (up to 30%)

Key Difference from US: US 83(b) election makes restricted stock taxed at purchase (typically $0) rather than vesting (when FMV higher). Indian founders don't have this option but also don't face vesting-date taxation risk.

Recommendation: Founders should purchase shares at incorporation when FMV is nominal (₹10 per share face value). Delay means higher FMV at purchase, higher immediate tax.

Sweat Equity Regulations¶

Section 54 of Companies Act 2013 allows companies to issue "sweat equity shares" to employees/directors for providing know-how or intellectual property rights or value additions. However, this is distinct from founder stock and involves complex compliance (special resolution, valuation report, lock-in period). Founders typically use regular equity, not sweat equity provisions.

4.11 References¶

1. Slicing Pie, "The Slicing Pie Handbook," https://slicingpie.com/

2. Y Combinator, "Splitting Equity Among Co-Founders," https://www.ycombinator.com/library/5o-splitting-equity-among-co-founders

3. Feld Thoughts, "Vesting," https://feld.com/archives/2005/05/vesting.html

4. Cooley GO, "Founder Stock: Vesting and Your Startup," https://www.cooleygo.com/founder-stock-vesting/

5. Orrick, "Term Sheet: Founders' Stock," https://www.orrick.com/en/Insights/Term-Sheet-Founders-Stock

6. The Founder Institute, "The Founder / Employee Equity Plan Calculator," https://fi.co/equity

7. Gust, "Founder Equity Calculator," https://gust.com/launch/tools/founder-equity-calculator

8. Wealthfront, "An Introduction to Stock Options for the Tech Employee or Startup Founder," https://blog.wealthfront.com/stock-options-tech-employees/

9. Ministry of Corporate Affairs, "The Companies Act, 2013 - Sections 38, 54, 68," https://www.mca.gov.in/

10. Income Tax Department, "Taxation of Equity Compensation in India," https://www.incometax.gov.in/

Navigation¶

Previous: Chapter 3: Funding Instruments Deep Dive
Next: Chapter 5: Building Your Fundable Company
Back to: Table of Contents

Related Chapters:

• Chapter 10: Understanding Equity and Control
• Chapter 15: ESOP Strategy and Employee Equity
• Appendix A: Legal Templates Library

Disclaimer¶

This chapter provides educational information about startup funding and is not legal, financial, or investment advice. Every startup situation is unique. Consult qualified professionals (lawyers, accountants, financial advisors) before making any funding decisions.

Last Updated: November 2025