Startup Equity Structure 101: Building a Cap Table That Works for Everyone

You're starting a company with two co-founders. How do you split equity? 50-25-25? Equal thirds? Based on who had the idea?

You're raising Series A. What size option pool do you need? 10%? 20%? How does it affect dilution?

You hire employee #10. Should they have a 1-year or 4-year vest? Cliff or no cliff?

These decisions feel small at the time. But they cascade through your company's entire life. Get them wrong, and you'll be dealing with cap table chaos, founder resentment, and investor skepticism for years. Get them right, and you have a structure that scales from 3 people to 300 without drama.

This guide covers the foundational equity decisions every startup founder needs to make: how to split equity with co-founders, how to size and manage option pools, how to structure investor equity, how to use vesting as a commitment mechanism, and how to track and maintain your cap table so it doesn't become a black box.

Co-Founder Equity Splits: Beyond "Equal"

Most co-founders split equity equally (3 founders = 33.33% each). But is equal always right? And more importantly, how do you make this decision without creating resentment that poisons the relationship?

The Case for Equal Splits

There's real power in equal splits:

• Simple and clear: No ambiguity about who owns what
• Forces commitment: Everyone has equal skin in the game, so everyone is equally motivated
• Avoids resentment: Nobody feels like they got shorted relative to their co-founders
• Founder departure handled by vesting: If one founder leaves, vesting cliffs take care of it (more on this below)
• Easier to explain: To investors, employees, and everyone else

Most successful startups use equal splits. Not because it's always perfectly fair, but because it's simple, it forces equal commitment, and it avoids creating the appearance of hierarchy among equals.

When to Deviate from Equal

Sometimes unequal splits make sense. If you're considering this, be very careful. Unequal splits can create resentment that poisons the company. But there are legitimate cases:

Critical point: Whatever you decide, put vesting in place immediately. Even equal splits can create problems if someone leaves day 1 and walks away with equity.

The Co-Founder Agreement

Whatever split you decide on, get it in writing. Handshake agreements fail. You need a proper stockholders agreement or founder agreement that covers:

• Equity split percentages
• Vesting schedule and cliff (see below)
• What happens if someone quits
• What happens if someone is fired
• Drag-along and tag-along rights (investor protection)
• Any special voting rights or board seats

Use Clerky, LawPath, or a startup lawyer. It costs $1-3K but saves you from massive problems later.

Vesting and Cliffs: Protecting the Company (and Everyone)

Vesting is how you earn your equity over time. It's not punishment—it's the standard way to align founder incentives. It says: "You earn your equity by staying and building."

The Standard: 4-Year Vest, 1-Year Cliff

This is the market standard for founder equity. Here's how it works:

• 4-year vest: Your equity vests over 4 years (monthly), so 1/48th per month
• 1-year cliff: If you leave before 12 months, you get 0% of your equity. If you leave after 12 months, you keep 25% (1 year of vesting) plus whatever else you've vested
• After year 1: You have 25% of your equity vested. Then you vest 1/36th per month for the remaining 3 years

Example: Founder with 50% equity vesting 4-year vest, 1-year cliff:

Why This Structure Matters

The cliff: This prevents people from leaving after a few months with significant equity. A founder who leaves after 6 months gets nothing. This is harsh, but it's standard because it prevents situations where someone works briefly then owns the company forever.

The 4-year vest: This keeps founders aligned for 4 years. If the company exits in year 2, you're probably not fully vested, so you have incentive to stay and help. This is good for company stability.

Monthly vesting: After the cliff, you vest 1/36th per month. This is continuous, so there are no big vesting events. If you leave month 25, you get 25.28% vested (not 25%).

Acceleration Triggers

You can add acceleration clauses that cause some or all of your unvested equity to vest if certain events happen:

• Single-trigger acceleration: All unvested equity vests if the company is sold. (Rare at top VCs; more common at smaller companies)
• Double-trigger acceleration: Unvested equity vests if company is sold AND you're fired or forced to leave. (More common)
• Cliff acceleration: Cliff is removed if you're fired without cause or the company is sold

Accelerations protect founders from situations where you're forced out after the company is sold but before your equity vests. Be careful: investors often push back on generous accelerations.

Employee Option Pools: Sizing and Strategy

An option pool is equity reserved for employees. It's how you attract and retain talent. But sizing it wrong can cause massive problems at fundraising time.

How Big Should Your Option Pool Be?

This depends on stage and hiring plans:

The Dilution Impact

Here's the key insight: when you create an option pool, you're diluting founders. If you create a 20% pool, founders are diluted by 20% (all else equal).

Example: Two founders, 50% each. You create a 15% option pool. Now: - Founder A: 42.5% (50% × 85%) - Founder B: 42.5% (50% × 85%) - Option pool: 15%

This is why Series A investors push back on large option pools. A 20% pool dilutes their ownership too.

Strike Price and 409A Valuations

The strike price is what employees pay per share when they exercise options. It should equal the fair market value of your stock, as determined by a 409A valuation.

If your strike price is too low, the IRS can claim it's a transfer of value (taxable to the employee as income). If too high, options are worthless to employees.

Action: Get a 409A valuation done by a real firm (costs $1-2K). This is required anyway for legal protection and prevents surprises later when employees realize their options are worth way less than they thought.

Investor Equity and Preferred Shares

When investors come in, they typically get preferred shares, not common shares like founders and employees get. This distinction is critical to understand.

Preferred Shares vs Common Shares

• Common Shares (founders/employees): Last in line on exit. You get whatever's left after preferred holders get paid. You have voting rights and board representation (if you're a founder).
• Preferred Shares (investors): First in line on exit. Protected liquidation preferences mean they get their money back before common shareholders. Non-voting (usually).

Understanding Liquidation Preferences

This is where it gets tricky. A typical Series A investor might have "1x participating preferred" meaning:

- On exit, the investor gets their $10M investment back first - If anything is left, they participate pro-rata with all shareholders

Example: You exit for $100M. Series A investor put in $10M with 1x participating preferred and own 10%.

• Investor gets $10M (their preference) + $9M (10% of remaining $90M) = $19M total
• Founders and employees split the remaining $81M

Multiple rounds of preferences can stack up. In a down exit, common shareholders (founders) might get nothing.

Common Equity Structure Mistakes

Mistake #1: No Vesting

You split equity equally and call it done. Now if a founder leaves day 2, they own 33% for life. This is catastrophic. Always use vesting.

Mistake #2: Option Pool Too Small

You create a 5% pool at Series A, then realize you need to hire a VP Engineering who wants 2%. Now you're fighting about pool size. Plan ahead.

Mistake #3: Not Tracking the Cap Table

You have a spreadsheet, but it's out of date. Nobody knows who owns what. Investors don't trust it. This becomes a nightmare in Series A. Use proper software.

Mistake #4: Giving Away Equity Casually

You promise an advisor 1% equity for "helping out." Now they don't do anything, but they own 1%. You can't undo it. Be careful about advisor equity.

Mistake #5: Unequal Splits Without Clear Agreement

You do 45-30-25 splits without documenting the reasons or having written agreements about what happens if someone leaves. Resentment builds.

Mistake #6: Ignoring 409A Valuations

You set strike prices without a 409A. Months later, the actual 409A comes back much lower. Employees now have a massive tax bill on their options.

Building and Maintaining Your Cap Table

A cap table is a living document. It changes every time you: - Grant options to employees - Have someone exercise options - Issue new equity to investors - Have someone leave (vesting stops)

Cap Table Software

Don't use Excel. Use proper software:

• Carta: Industry standard, most comprehensive, used by most VCs
• Pulley: Modern, founder-friendly, good UX
• Tessercube: Simpler, cheaper, works for smaller companies
• Shareworks (Schwab): Built for employee option management

Start with something simple, upgrade when you raise money. Most VCs will ask for a cap table in specific format anyway.

What Your Cap Table Should Show

• All shareholders (founders, employees, investors)
• Number of shares each person owns
• Fully diluted ownership (assuming all options get exercised)
• Strike prices for option holders
• Vesting schedules for each grant
• Liquidation preferences for investors

Cap Table Updates and Audits

Update your cap table every time you: - Grant options to a new employee - Have someone exercise options - Have investor funding - Have someone leave the company

Before Series A, have a lawyer audit your cap table. Surprising issues come up: someone who wasn't added to the option grants, old consultant equity that's still vesting, etc. Better to find these before VCs do.

Cap Table by Stage: What Changes When

Seed Stage (Pre-PMF, Team = 3-5)

Focus: Keep it simple.

• Founders: Equal splits with 4-year vest, 1-year cliff
• Option pool: 5-10%, don't worry too much
• Investors: If friends/family, often just common shares
• Cap table: Excel is fine for now (upgrade later)

Series A (PMF Achieved, Team = 10-15)

Focus: Get it right for growth.

• Founders: Still equal, but vesting is now critical
• Option pool: Grow to 10-15%
• Investors: Preferred shares, liquidation preferences
• Cap table: Audit by lawyer, use real software (Carta, Pulley)
• 409A valuation: Do this before Series A close

Series B (Proven Unit Economics, Team = 25-40)

Focus: Prepare for liquidity and complexity.

• Founders: Still equal, but some vesting erosion from options granted
• Option pool: Expand to 15-20%
• Investors: More complex preferences, maybe seniority
• Cap table: Must be clean and audited

Special Equity Situations

Advisor Equity

You want to give an advisor some equity to incentivize their help. Be careful. Standard advisor equity: - 0.25-0.5% for strategic advisors - 4-year vest, 1-year cliff - Clear expectations about what they're doing

Make sure it's vested. You don't want someone owning 1% forever because they gave you advice 3 months in.

Secondary Sales

Sometimes early employees or advisors want to sell their shares. This is a secondary transaction. You can allow it, but manage it carefully: - Get a valuation - Update cap table - Make sure you have right of first refusal (you can buy first if someone wants to sell)

Employee Equity Refreshes

As your company grows and gets more valuable, employee options become worth more, but you're not giving out more equity. By Series B/C, consider equity refreshes where you grant additional options to key employees to keep them motivated.

Dive Deeper Into Specific Topics

This guide covers the foundations. For specific situations, we have detailed guides:

The Bottom Line on Equity Structure

Getting equity structure right from day one prevents years of cap table chaos and founder friction. The decisions are:

• Co-founder splits (usually equal with vesting)
• Vesting schedules (4-year vest, 1-year cliff is standard)
• Option pool sizing (10-15% at Series A is typical)
• 409A valuations (get done before you raise)
• Cap table tracking (use real software, not Excel)

You don't have to be perfect. You just have to be thoughtful, document your decisions, and use vesting to protect the company. Most successful startups use similar equity structures—equal founder splits with 4-year vesting and 10-15% option pools. These are proven to work.

Get it right now, and your cap table will scale from 3 people to 300 without drama. Get it wrong, and you'll spend years dealing with founder resentment, investor skepticism, and cap table chaos.

The time to think about this is now, before there's conflict. Have the hard conversations with your co-founders, get a lawyer to document it, and move forward with a structure that works for everyone.

Frequently Asked Questions