The division of equity at the company’s earliest stage is one of the most consequential decisions a founding team makes – and yet one of the least rigorously handled.
In this article, we see Callum Morgan of JPC Corporate Department advise on the pitfalls of start-up investor capital and more particularly what JPC can offer to mitigate risk and to increase successful growth and development.
Equity allocations at a start-up provide the necessary motivation for the initial team to build a company, but doing so must be handled with caution as unfair ownership splits can quietly destroy a founding team’s trust in each other before the business even has a chance to get off the ground.
Too often, determining equity allotments is done in an afternoon, sealed with a handshake, and never revisited until it becomes a problem. At that point, it’s usually too late.
So, how best to divide equity in a business that is fair, clear, and legally enforceable?
In this article, we look at the common mistakes parties make, important considerations and finally JPC’s structured approach to address exercises like this that links equity to actual contribution – both now and in the future.
A. Where Most Startups Go Wrong
1. Splitting Equity Equally by Default
This approach feels democratic, avoids conflict, and seems fair. It’s also usually wrong. Whilst determination and enthusiasm can be evenly divided at an early stage, actual contributions over time will not be. Equal divisions of equity rarely reflect the contributions each founder provides over the course of the company’s lifetime in terms of time spent, risk, and effectiveness. When things start to become unbalanced, resentment, disenfranchisement and conflict emerge as founders can feel undervalued.
2. Rewarding Past Ideas Instead of Future Value
One founder had the idea. Another built the MVP. A third invested some initial funds. This might feel like the hard part but the reality is that the work already done will have little to do with the long-term success of the company.
Most early-stage startups pivot – often more than once. The MVP will get rebuilt and the original idea will evolve with feedback from the market or will be dropped entirely. Any initial funds will only take the business so far.
What matters is who contributes what over the next 18 to 36 months consistently, full-time whilst under pressure. The idea may spark a company into life, but execution determines whether you have a business.
Equity is about ownership of value, and for start-ups value is created over time, through execution.
3. No Clear Roles or Measurable Commitments
Another common issue with early teams is issuing titles but failing to set defined jobs. This not only impairs operational accountability but also undermines any attempt to link equity to contribution. Vague participation agreements or informal commitments cannot support structured enforcement especially where equity is at stake.
B. A Structured Approach to Equity Allocation
Early equity decisions have long-term consequences.
Done badly, they create deadlock, dilute incentives, and create irreparable damage to relationships and fundraising prospects. And yet, most teams still rely on instinct, convenience, or default equity divisions with no accountability.
Here at JPC, our approach offers a better alternative: one that is principled, transparent, and enforceable.
By combining a scorecard-based initial equity division with a legally backed reverse vesting framework based on actual contributions, founders can protect the business from early departures and build an equity structure that holds up under investor scrutiny.
JPC’s Approach
1. Structured Scorecard Allocation
The starting point is a rational, evidence-based method for dividing equity among founders – one that reflects projected value creation rather than assumption or sentiment.
Each founder is evaluated across four core categories:
1. Idea & Intellectual Property – who contributed the core concept, technology, or proprietary insight?
2. Time Commitment – who is working full-time, and who remains part-time or conditional?
3. Domain Expertise & Track Record – who brings industry knowledge, start-up experience, or proven execution capability?
4. Capital Contributions – who has funded the company to date?
Each founder then completes a standardized 0-10 assessment across all categories – including of themselves. Weightings are then applied (e.g. Time: 40%, IP: 25%, Expertise: 25%, Capital 10%), and final scores are translated into a proposed equity split. Weightings and categories can be shifted depending on the context and nature of the business, but the approach is there to provide a transparent, structured basis for negotiation and reduce the subjectivity or imbalance that often undermines early equity discussions.
2. Reverse Vesting Mechanism
In the UK, standard vesting arrangements (as commonly used in the US) are not directly enforceable. English company law does not allow a company to simply ‘cancel’ shares at a future date unless specific contractual mechanisms have been put in place beforehand.
This means that in principle a founder who receives shares at incorporation, but exits after 6 months, could retain full legal ownership of his or her initial shares which would not be a preferred outcome.
To address this, UK startups can use “reverse vesting”. Under this structure:
1. Shares are issued upfront (usually at nominal value).
2. The founders enter into a contractual agreement that allows the company to repurchase any shares issued but where conditions attached to the issuance of the share capital have not been met or if persons leave the company.
3. The repurchase is typically at a nominal value, ensuring the economic effect of ‘forfeiture’ without being in breach of English company law.
An arrangement might include:
1. Vesting period: where shares are issued and allotted over a period of dependent on criteria being met or simply issued and allotted over a period of time only.
2. “Cliff”: Where an individual is obligated to remain as an employee for example for a set period of say 12 months (no vesting until one year of service) in order to qualify for the vesting.
3. Leaver Provisions:
a. Good leaver: retains vested shares.
b. Bad Leaver: forfeits unvested shares, which are repurchased at nominal value.
3. Founder Contribution Schedule
While vesting mechanisms determine whether equity can be retained or clawed back, they only become meaningful when paired with a clear, measurable set of expectations for each founder. This is the role of the Founder Contribution Schedule – a document that sets out each founder’s commitments in concrete, trackable terms.
The Contribution Schedule should describe the scope of each founder’s responsibilities, the minimum level of time commitment required, and the specific deliverables they are expected to achieve. These may include development milestones (such as delivery of an MVP), operational outcomes (such as completing a funding round or hiring a core team), or business development goals (such as generating a defined number of customer leads of partnerships). From a legal standpoint, the Contribution Schedule should be appended to the Shareholders’ Agreement and explicitly referenced in the clauses dealing with vesting, leaver status and buyback rights. It should also reflect the terms of each founder’s service or consultancy agreement, so that any failure to meet agreed obligations can trigger appropriate action.
Legal Enforceability
To implement reverse vesting effectively under English law, three core legal types of documentation are required:
(i) a Shareholders’ Agreement (and ancillary documents in support);
(ii) Service Agreements; and/or
(iii) Consultancy Agreements for each founder.
Together, this documentation helps to ensure that the reverse vesting structure is enforceable and commercially appropriate.
Here at JPC we support founders and growth technology companies through the full implementation of reverse vesting frameworks but also as concern other approaches to the issuance of share capital.
This includes drafting, advising upon and negotiating bespoke Shareholders’ Agreements with appropriate leaver and buyback provisions, preparing founder agreements that accurately reflect commercial and legal obligations and designing contribution schedules that are measurable, enforceable, and acceptable to investors. We also work closely with tax advisers to assist with Section 431 elections and to ensure that founders are protected from avoidable liabilities, and that the cap table remains investable and scalable through future rounds.
When implemented correctly, “reverse vesting” provides UK startups with a practical, legally sound method of aligning ownership with delivery – giving founders protection, accountability, and a foundation investor can rely on.
If you would like to discuss your own needs and requirements in relation to your start-up, then please reach out to Callum Morgan in the Corporate Department by email at cmorgan@jpclaw.co.uk or by phone on 0207 644 7277 here at JPC.
