How to distribute startup equity fairly among founders

Executive overview

Equal splits between founders are the default — and often wrong. Founders differ in time commitment, market value, and capital contributions, so a formula-based approach produces fairer outcomes.

The TOC framework (Time, Opportunity Cost, Cash contributions) converts these differences into a rough equity split. It won't cover every edge case, but it gives you a principled number to start from rather than defaulting to 50/50.

• Everyone, including founders, should vest equity — typically four years with a one-year cliff.
• Opportunity cost is normalised by asking: what would each founder earn at the same company, same location?
• Cash contributions are handled by agreeing on a pre-money valuation, then calculating the resulting dilution.

Unequal contributions deserve unequal equity; a formula makes that conversation easier.

Vesting basics

• Standard schedule: four-year vesting, one-year cliff — 25% at month 12, remainder monthly after.
• Shorter schedules exist (e.g. three years with or without a cliff); structure to suit the team.
• Vesting protects co-founders if someone leaves early.

The TOC framework

• T — Time: hours per week each founder commits to the company.
• O — Opportunity cost: normalised salary (same company, same location) divided by 2,000 to get an hourly rate.
• C — Cash contributions: founder invests capital; agree on a pre-money valuation, calculate the post-money percentage, dilute all other founders pro rata.

Example 1: different salary levels, equal hours

• Founder A: $80k/yr → $40/hr; Founder B: $160k/yr → $80/hr.
• Combined rate: $120/hr. Split: 67% / 33%.
• The senior founder sacrifices more in opportunity cost — the formula captures that.

Example 2: salary gap offset by compensation draw

• Founder A: $100k/yr → $50/hr; Founder B: $150k/yr → $75/hr but draws $25/hr from the company.
• Net hourly rates equalise at $50/hr each → equal split justified.

Limitations and when to go deeper

• The framework assumes everyone starts simultaneously and works the hours they commit to.
• Edge cases (staggered start dates, changing time commitments) require a more thorough approach.
• The Slicing Pie Handbook (available on Amazon) covers these edge cases in full detail.