How to Structure Share Dilution Agreements Between Co-Founders

Starting a new venture with co-founders is an exciting journey filled with potential for growth and success. However, one of the critical aspects that can make or break a startup is how equity is managed and diluted over time. Share dilution agreements are essential to ensure that all founders are on the same page and to prevent conflicts down the road. This blog will guide you through the key considerations and steps to structure share dilution agreements between co-founders effectively.

Understanding Share Dilution

Before diving into the structuring of agreements, it’s important to understand what share dilution is. Share dilution occurs when a company issues additional shares, thereby reducing the ownership percentage of existing shareholders. This typically happens during fundraising rounds, employee stock option plans (ESOPs), or new co-founder additions. Properly managing dilution is crucial to maintaining fairness and motivation among co-founders.

Key Considerations in Structuring Share Dilution Agreements

1. Initial Equity Split

The initial equity split should reflect the contributions and commitments of each co-founder. Consider the following factors:

• Role and Responsibilities: How critical is each co-founder’s role to the success of the company? For example, the CEO might have a larger share due to their leadership role and overall responsibility for the company’s direction.
• Experience and Expertise: Does the co-founder bring unique skills or industry knowledge? A technical co-founder with years of industry experience might warrant a higher equity percentage.
• Financial Investment: Has any co-founder invested personal funds into the startup? If one co-founder has put in a significant amount of capital, this should be reflected in their equity stake.
• Time Commitment: Are all co-founders committing full-time or part-time to the venture? Full-time commitment often warrants a larger share due to the greater risk and opportunity cost involved.

Document the rationale behind the equity split to ensure transparency and mutual understanding

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