Part 2: Founder Equity

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.

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%.

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?

Tracking Ownership: The Cap Table

Over time, how equity is split across founders, investors, and staff will be captured in a capitalisation table (or cap table for short). This shows who owns what. More on that to come.

2. Why Founder Equity Matters

Two main reasons:

1. Ownership (economic value): Your equity is your reward for the risk, effort, and time invested in your startup. Successful startups can generate significant financial returns for shareholders, either through dividends (paying profits to shareholders) or an eventual sale of the company.
2. Control: Generally, shareholders ultimately control the company by deciding who sits on the board, and the board sets strategy and makes key decisions. Some major decisions also require shareholder approval. So equity is not just about financial return - it also shapes who controls the startup.

Your equity is valuable. You’ll likely give some away as you grow (to investors, employees, or advisors) and that’s a normal part of building a company. But it’s important to be deliberate about what you’re giving up and what you’re getting in return.

3. How Should Co-Founders Split Equity?

One of the biggest early decisions for any founding team is how to split the equity.

This isn’t a legal question, it’s a commercial one that the co-founders need to agree on. You’ll either split the equity equally, or reach a shared understanding that an unequal split is justified.

Our general view? Be forward-looking and realistic on the value of your contributions, and don’t overvalue who came up with the idea. Here’s why:

• Startups are about execution, not ideas. The idea alone isn’t what gets your product to market or generates traction - the founding team does.
• You’re playing a long game. It usually takes 7 to 10 years to build something meaningful. Small differences in the early days rarely justify a radically uneven split over the life of the company.
• Motivation matters as most startups fail. The more motivated the team, the better your odds. Giving one founder a bigger slice of the pie means nothing if the pie never gets made.
• Investors are watching. A lopsided split sends a message that your co-founder isn’t highly valued. Early-stage investors back founder teams. If you don’t value them, why should investors?

Base your equity split on what lies ahead, not what’s behind.

As a team:

• Have an honest conversation about what each of you is committing (in time, money, emotional energy, and skills) to get to MVP and beyond, and the true value of that.
• Write down what you expect from each other as a moral commitment to each other.

If everyone’s contributing at a similar level and bringing valuable skills, an equal split can work well. But if someone is putting in significantly more (whether it’s time, capital, or a rare specialist skill) that may need to be reflected in the equity split.

Dynamic Equity (aka “Slicing the Pie”)

You might’ve seen this idea floating around LinkedIn, Reddit, or your favourite startup podcast: dynamic equity, sometimes called “baking the pie.”

The idea is simple in theory: before raising capital, co-founders track their contributions to the business in a spreadsheet (usually time, money, or both). Then, once the company hits a key milestone (often the first capital raise), they "bake the pie" by splitting the equity based on those recorded contributions.

It sounds fair, but we rarely see it used in NZ. There are a few reasons for that:

Keeping the spreadsheet up to date is a hassle. People forget, records are inconsistent, and it often creates more confusion than clarity.

It can create tension. Tracking inputs puts co-founders in the position of constantly measuring each other’s value, which can damage trust over time.

It likely raises unintended tax consequences. When equity is clearly linked to past effort or services, the IRD may treat that equity as taxable income. If the company has grown in value, the tax exposure can be significant, especially if you’ve just agreed a pre-money valuation for a capital raise.

In most cases, a better approach is to agree on a fair equity split upfront, based on expected contributions going forward, and put founder vesting in place to protect everyone if someone leaves early (more on that below).

4. Putting Shares in the Hand of Founders

You’ve agreed on the split — now what?

Once you’ve landed on how to split the equity amongst the co-founders, there are two key steps to put this in place:

1. Getting the shares into the hands of the co-founders.
2. Setting up co-founder vesting terms

Setting up the Shareholding

While we can’t give tax advice, we want to help you spot potential risks - especially around how and when shares are issued.

In our experience, many founder teams don’t finalise the equity split until the company is already up and running. When that happens, founders often transfer shares between themselves later, without considering the tax implications.

That might feel harmless early on, when the shares seem to have little or no value. But if the company takes off, and those shares become worth something, IRD may look back and scrutinise the original transfers - especially if they look like unrecorded employment compensation.

The Cleanest Path

The co-founders agree on the split before the company is incorporated. That way, you can set things up cleanly from day one.

Example: Sally, Rachel and Ben agree to split the equity equally.  They incorporate a company with 1,200 shares — each holds 400 shares. Simple

Already incorporated? Be cautious with share transfers

But…. what if the company is already set up and one founder (say, Sally) holds all the shares? That’s where things can get tricky from a tax perspective.

Consider Your options by following this checklist

We’ve created a simple checklist to help you assess whether your company might already have material value, and what that could mean for share transfers between founders, or new share issues, at a price less than that value.

It’s not a substitute for tax advice, but it can help you identify red flags early.

If in doubt, talk to your accountant or tax adviser before moving shares around or issuing new ones.

5. What is Founder Vesting?

You and your co-founders agree to an equity split because you're all committing to the same mission: to dig in, take risks, and try to turn an idea into something real over the next few years.

That split is based on a shared understanding: “we’re in this together”.

But life happens. Circumstances change. Sometimes people realise startup life isn’t for them. If that happens, would the rest of the team feel good about grinding it out while someone who left early still holds a full equity stake? Probably not. And nor should you.

Even if it feels fine now, fast-forward seven or ten years - it takes a pretty generous person not to feel frustrated in hindsight. That’s why it’s smart to set expectations early.

That’s why founder vesting comes in. It protects the team by ensuring founders “lock in” (i.e. get to keep) their equity over time, not all at once.

6. What Does Vesting Look Like?

There are three things to agree on:

1. How many shares are subject to vesting

At an early stage, it's common (and recommended) for a substantial portion of each founder’s shares to be subject to vesting, as all the hard work is still ahead.

Think about what’s already been done, versus what still needs to happen to turn the idea into a real, valuable business. If you’re only a few steps into a long journey, the number of shares still to vest should reflect that.

The Vesting Period

This is the timeframe over which shares become fully vested / retained. Once the period ends, the shares are yours - even if you leave the company.

The Vesting Criteria

This is what each founder needs to do during the vesting period for their shares to vest. Most teams tie this to a clear contribution, often expressed as a minimum hours-per-month commitment.

For early-stage startups, the most common structure looks like this:

• All founder shares are subject to vesting
• The vesting period is four years, with a one-year cliff (i.e. if a founder leaves within the first 12 months, nothing vests and the shares are repurchased for $1 in total)
• After one year, 25 percent of the shares vest. The remaining 75 percent vests in equal monthly chunks over the next three years
• Vesting is conditional on meeting agreed expectations, usually tied to time or effort (such as a certain number of hours per month or defined contribution milestones)
• Unvested shares cannot be transferred until they are vested

These settings aren’t one-size-fits-all. Think about what works best for your start up. For example, if you’re a deep tech company with a long R&D runway, a longer vesting period might make more sense.

Vesting FAQ: Other Vesting Considerations

7. Bonus: IP Assignment Deed for New Zealand Startup Founders (Downloadable)