Author: Junanda ConsultingReviewed by: Junanda Service Team2026-09-19
When several people start a business together, the thing most likely to go wrong is not the market and not the product — it is that first equity agreement that everyone treated as "let's just put something down for now and adjust it later." In the early days trust is high, talking about money feels awkward, so the founders split the equity evenly by headcount or simply agree a percentage verbally and get to work. Only once the company starts to gain traction do the differences in contribution, capital and influence surface, and by then there is no written rule anyone can point to. The essence of an equity arrangement is to resolve, in advance and in writing, the disagreements that may arise in the future.
Why an Equal Split Is the Most Dangerous Structure
Three founders at 33.3% each, or four founders at 25% each, looks like the fairest possible outcome. In practice it places the company in a structural deadlock.
Nobody can decide. Major matters generally require approval by more than two-thirds of the voting rights. Once the equity is split evenly, no two people can assemble a decisive majority, and any single person can block everything.
Deadlock is extremely expensive. Day-to-day operations depend on speed, and deadlock consumes the window of opportunity.
Disagreement escalates into confrontation. In an even split, nobody defers to anybody, and a difference of business judgement very quickly turns into a contest for control.
There is no exit. Without an agreed exit mechanism, a shareholder who contributes neither effort nor an exit leaves the others with no remedy at all.
A more reliable approach, and the one most commonly adopted, is to give the core decision-maker a relatively concentrated block of voting rights so that someone can actually make the call, while protecting the interests of the other partners through dividends, options or agreed returns. Fairness does not mean equality. Fairness means that each person's contribution and return stand in a clear, pre-agreed relationship to one another.
How to Quantify Capital and Contribution
Equity cannot be based only on who paid in how much cash. Much of the value in a start-up comes from non-cash contributions, and the way those are priced must be agreed in advance.
Type of contribution
Common approach
What to watch
Cash capital
Converted at the amount actually received
Agree the payment deadline and the consequences of default
Technology, patents
Valued and contributed as equity
Confirm whether ownership is transferred to the company
Customer and channel resources
Vesting over time against agreed conditions
Whether the resources can genuinely be supplied on a continuing basis
Full-time commitment
Treated differently from part-time involvement
Full-time founders should receive a higher proportion or faster vesting
Brand, premises, equipment
May be discounted or covered by a usage agreement
Avoid commingling with company assets
One practical principle: separate "money contributed" from "person contributed." The money side is calculated by amount. The people side is calculated by role, time and performance, and it must be tied to whether the person continues to work in the company.
Voting Rights and Dividend Rights Can Be Separated
Company law allows shareholders to agree in the articles of association that voting rights need not follow the proportion of capital contributed. This is an important tool for resolving the tension between "the person who put in the most money wants control" and "the person who put in the most effort wants a return."
The general concept of differentiated rights. The voting rights attached to shares can differ from dividend rights — for example, one founder may be granted a higher proportion of voting rights while dividends continue to follow the capital contribution ratio.
The articles prevail. Arrangements of this kind are only binding if they are written into the articles of association or a shareholders' agreement. Verbal assurances mean nothing.
Draw the boundary clearly. Which matters follow the agreed voting rights and which require unanimous consent must be listed item by item, so that no room for interpretation is left.
Do not over-engineer. The more complex the structure, the higher the communication cost when you later raise funding or file registration changes.
Acting-in-Concert and Deadlock-Breaking Mechanisms
There is more than one way to prevent deadlock, and they are usually used in combination:
Define the voting rules. State clearly what proportion is required for ordinary resolutions and special resolutions respectively, so that "everyone agrees by default" never becomes the assumption.
Acting-in-concert arrangements. Agree that on specified matters certain shareholders will vote as directed by one party, or sign an acting-in-concert agreement in advance.
Set procedural rules. How meetings are convened, how many days' notice is required, how absence is handled, and whether written resolutions are permitted.
Tiered decision-making. Split matters into two levels: day-to-day operations decided by the general manager, and major matters decided by the shareholders' meeting.
Dispute resolution. Agree on negotiation, mediation, arbitration or litigation, and specify the jurisdiction.
A final fallback clause. The path to follow if mediation fails — for example, a right for one party to buy out the other at an agreed price.
Vesting and Repurchase Clauses
Equity vesting. Agree that the equity will be earned gradually over a number of years, and that if a founder leaves before the period ends, the unvested portion is bought back by the company or by the other shareholders at an agreed price. A common form is vesting year by year with an initial observation period.
Repurchase clauses. Agree on the triggering events (voluntary resignation, material breach, prolonged failure to perform duties, loss of working capacity, death) and on how the repurchase price is calculated. The pricing formula must be written out; "to be agreed by negotiation" is not a formula.
Source of the repurchase funds. Whether the company repurchases or the other shareholders acquire the equity matters, because it involves a capital reduction procedure or a share transfer. The route should be determined in advance.
Spouses and inheritance. How equity will be handled if a marriage changes or an inheritance arises can be agreed in the shareholders' agreement ahead of time.
Exit Mechanisms and the Employee Option Pool
Exit scenarios should cover at least four categories: voluntary exit, departure, breach of contract and death. For each one, the agreement must state how the equity is handled, at what price, and within what period.
An employee option pool is a reserved pool of equity set aside to incentivise future key employees. It is normally reserved before a financing round, and the agreement should specify who holds it on behalf of the company, how it will be allocated, and the conditions for exercise and for clawback. The size of the pool should not be expanded casually, because it dilutes existing shareholders, and a cap should be set in the agreement.
Nominee shareholding is an arrangement many founders use. Its risks concentrate in three places: difficulty of becoming a registered shareholder when the actual investor asks to be recorded as a shareholder; unclear tax treatment, in particular who is liable for tax at the dividend and transfer stages; and difficulty of proof in a dispute, since if the nominee refuses to cooperate the actual investor faces very high costs in enforcing their rights. Where direct shareholding can solve the problem, avoid nominee arrangements.
Self-Check Checklist
Are all shareholders reflected in the business registration, or is there complete written documentation for any nominee shareholding?
Are the articles of association and the shareholders' agreement consistent, and which prevails if they conflict?
Is the method of calculating voting rights set out item by item, and is the list of major matters enumerated?
Are there two or more shareholders holding identical proportions who can block each other?
Have non-cash contributions been valued, has ownership been transferred, and is there a valuation or pricing basis?
Are the vesting period, repurchase triggers and repurchase price formula all agreed?
Are the four exit scenarios — departure, breach, death and change of marital status — covered?
Are the option pool size, grant conditions and clawback conditions documented?
Are there clear procedural rules, notice periods and dispute resolution clauses?
Is room left for equity dilution and priority rights at a future financing round?
This article is general business information prepared by Junanda Consulting. Specific policy positions, tax rates, deadlines and procedural requirements are subject to the latest official versions issued by the competent authorities. To understand how these requirements apply to your business, please contact Junanda Consulting for further information and support.
