How should cofounders split equity?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
No law sets the split; cofounders agree it between themselves. Most base it on expected future contribution, not just past work: roles, time commitment, capital, and IP brought in. Whatever the numbers, put vesting on every founder's shares and record the split in a shareholder agreement, so the split still makes sense if someone leaves.
Is there a standard split?
No. Neither Ontario’s Business Corporations Act nor the CBCA says anything about how founders divide shares. The directors issue shares to whoever the founders agree, for whatever consideration the directors accept, as long as the shares are fully paid before they’re issued (section 25 of the CBCA, section 23 of the OBCA). What matters legally is that the split is written down and approved properly.
What should we weigh?
Most of a startup’s value is created after incorporation, so weight the future more than the past:
- Role and time. Who is full time, and from when? A founder staying in a day job for a year contributes differently.
- What each person brings. Existing code, a prototype, a customer list, domain knowledge or a patent application. If it’s IP, it also needs to be assigned to the company in writing (see below).
- Cash. Money a founder puts in can be treated as a loan or a share purchase instead of being folded into the split.
- Who’s hard to replace. The technical founder of an AI product, or the licensed practitioner in a clinic business.
Is a 50/50 split a bad idea?
Not necessarily, but it creates deadlock risk. With two equal shareholders and two directors, neither can outvote the other on the board or at a shareholder meeting. If you choose an even split, agree in the shareholder agreement how deadlocks get resolved: a casting vote on some issues, a mediator, or a buy-sell mechanism such as a shotgun clause.
How does vesting fit in?
Vesting is what keeps the split fair over time. With founder vesting, each founder owns their shares from day one but the company can buy back unvested shares if they leave early. A founder who leaves after six months then keeps a share that matches six months, not the whole stake. Without it, see what happens if a cofounder leaves without vesting?
| Choice | Without vesting | With vesting |
|---|---|---|
| Founder leaves early | Keeps all shares | Unvested shares can be bought back |
| Effect on remaining founders | Carry a large passive holder | Equity can be reused to recruit |
| Investor reaction | Often asks for vesting before closing | Expected |
What about the IP each founder brings?
Under section 13 of the Copyright Act, the author of code is generally its first owner, and an assignment must be in writing and signed. Code a founder wrote before incorporation stays theirs until it’s assigned to the company. Pair the split with an IP assignment from every founder. Our who owns your code check helps spot gaps.
Should we leave room for others?
Plan for it. An option pool for future hires, and possibly advisors, will dilute every founder. The split is between founders; the pool comes out of everyone. See can I issue shares to an advisor?
How do we document it?
- Agree the split, the vesting schedule and roles in writing while everyone agrees.
- Issue the shares by directors’ resolution, at a nominal price, and record them in the securities register and cap table.
- Sign a shareholder agreement, vesting terms and IP assignments.
- Talk to an accountant before issuing shares, especially if any founder is a US taxpayer or wants to use a holding company.
Our founder pack combines incorporation, a shareholder agreement and founder vesting with IP assignments, starting at $2,360. Each is also available separately: shareholder agreement and founder vesting and IP assignment. Fees are in Canadian dollars and exclude HST; government filing fees and other disbursements are charged at cost.
This guide is general information about Ontario and Canadian law, not legal advice for your situation. To talk through your split with your cofounders, book a free 15-minute consult.