Part 2: Founder Equity

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How founder equity works, why dilution happens, and how to fairly split, issue, and vest shares to protect co-founders, motivate teams, and attract investors.

Outline:
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Disclaimer: This content is not legal advice. It is general commentary designed to help founders get their heads around key legal concepts, decisions and risks - but it doesn’t account for your specific circumstances.

Every startup is different, and the right approach will depend on your unique situation. If you’re making important legal decisions or signing anything binding that you are unsure about, talk to a lawyer.

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1. What is Founder Equity & Dilution?

Founder equity / co-founder equity is your ownership stake in your startup. Most startups are structured as companies, so this ownership is reflected in the shareholding of the company you’ve set up. When we talk about your “equity,” we mean your percentage ownership of that company.

Example: If your company has 1,000 shares and you own 750 of them, you hold 75% of the company - that’s your equity stake. Simple.

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How are founders diluted?

Founders usually don’t hold 100% of the equity forever. You lose your equity (% ownership) in one of two ways:

You transfer or sell shares, or (more commonly)
New shares are issued to others, and your percentage ownership is diluted.

This dilution usually happens when:

You raise capital, and issue shares to investors
You create an employee share scheme (ESOP), and set aside shares for key hires

Example: Following on from the above example, the company issues 150 new shares to an investor and a further 50 new shares to key employees. The company now has 1,200 shares and you own 750 of them. Meaning your equity has been diluted from 75% to 62.5%.

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Is dilution bad?

While dilution might sound negative (you own a smaller percentage of the company), the key question is: does it help grow the value of the business overall?

Raising capital or granting equity to key hires will dilute your ownership, but if those moves help the company grow faster or stronger, your smaller slice could end up being worth a lot more.

Think of it like this: Would you rather own 100% of a company worth $1 million, or 5% of a company worth $1 billion? (5% of $1 billion is $50 million, btw)

When considering anything that causes dilution, think critically: Do I think this will this make the company more valuable in the long run?

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