Who Gets Equity in Year One?
A Founder’s Guide to Early Equity Decisions That Protect Value
In the first year of building a business, equity can feel like both rocket fuel and a live grenade.
Handled well, it aligns the right people, attracts talent you couldn’t otherwise afford, and supports long-term value creation. Handled poorly, it creates resentment, legal disputes, and a messy cap table that can limit growth — and weaken your exit position later.
Early equity decisions don’t just reward contribution.
They shape control, accountability, decision-making — and future deal readiness.
This guide will help you make thoughtful, defensible choices in year one, whether you’re building a start-up, scaling an SME, or transitioning a family business into its next chapter.
1. Start with the principle: equity rewards risk and responsibility — not goodwill
Equity is not a thank-you gift. It’s a transfer of ownership.
The people who should be considered for equity in the first year are those who:
carry meaningful risk (financial, reputational, opportunity cost)
hold decision-making responsibility and are accountable for outcomes
shape long-term value (not just deliver tasks)
bring capability you cannot easily replace
are committed to staying long enough for the business to benefit
When founders anchor equity around risk + responsibility, decisions become clearer and far less emotional.
2. Who Typically Gets Equity in the First Year?
Founders
Non-negotiable — but the split must reflect reality, not politeness.
Consider:
origin of the opportunity or IP
commercial vs operational leadership contribution
time commitment
capital injection (if any)
customer responsibility and reputational exposure
who carries the “CEO weight” when it gets hard
Avoid “equal split to keep things friendly.”
That awkward conversation doesn’t disappear — it returns later, at ten times the cost.
A genuine operating partner (sometimes called co-founder, sometimes not)
This is the person who materially changes the trajectory of the business — often someone who:
owns a critical work-stream (e.g., sales, delivery, product, operations)
has authority, not just workload
is building repeatable capability and team infrastructure
would be hard to replace without significant delay and cost
Equity here should reflect contribution and risk — and always be protected by vesting.
Key early hires you can’t scale without
These aren’t “nice to have” employees. They’re early builders of capability and capacity.
Typically, these include:
a first senior sales leader with a track record
a head of operations / delivery lead
a senior technical lead (where relevant)
a finance lead who brings discipline and visibility early
These grants should be modest and structured — this is key hire equity, not founder equity.
Advisors (with clear deliverables)
Advisors can add value, but equity should be:
small
time-limited
tied to clear outcomes
reviewed regularly
If you wouldn’t pay for the advice, don’t give away ownership for it.
Investors (if applicable)
Investment equity is different: it’s a capital-for-shares exchange at an agreed valuation.
It’s not the same as “rewarding contribution” — and should be treated as a separate track.
3. Who Should Not Get Equity in Year One
Founders often give equity to ease discomfort. That’s where trouble starts.
Avoid equity for:
friends who helped early but aren’t joining meaningfully
freelancers/contractors who are paid market rates (unless they convert into core leadership)
anyone with vague deliverables or “we’ll see” roles
people you’re trying to keep engaged emotionally
team members unlikely to survive the next stage of growth
If someone won’t be meaningfully contributing over 3–4 years, they don’t need equity.
They need a fee, a bonus, a referral, or a thank-you — not ownership.
4. Vesting Is Your Safety Net
No one should receive equity that vests immediately — including founders.
Typical vesting structure:
4 years total
1-year cliff
monthly vesting after the cliff
reverse vesting for founders (especially important if investors may enter later)
This protects against the classic scenario:
A key person leaves after 8 months — and keeps a large chunk of the company.
Vesting keeps ownership aligned to ongoing contribution.
5. Watch for the “Year One Overcorrection”
Equity mistakes are often made in moments of pressure.
Founders give away equity because they feel:
grateful
overwhelmed
worried someone will leave
out of their depth
pressured by an advisor or early supporter
keen to hire fast
Those are emotional triggers — not strategic reasons.
Equity should be treated as business architecture, not relief from anxiety.
6. Practical Framework: A Three-Question Test
Before giving equity to anyone in year one, ask:
Are they critical to value creation or survival?
If they disappear, does the business stall or significantly de-risk?Are they taking meaningful risk?
Not just working hard — but genuinely sharing downside.Will their contribution still matter in 3–4 years?
Equity is a long game. If the answer is no, use compensation instead.
If you can’t answer “yes” to all three, you’ve got clarity.
7. Keep Equity Clean for Future Investors, Buyers — and Future Leaders
Year-one equity decisions echo later.
As you grow, external parties will look at your ownership structure and ask:
Is the cap table clean and credible?
Are early grants justified?
Are there any awkward blockers to leadership succession?
Is decision-making stuck with the wrong people?
Messy equity can:
reduce valuation
slow due diligence
force renegotiations
make it harder to hire senior talent
create governance paralysis at the worst time
Protect future you — and protect the business’s options.
8. Document Everything (this is where serious value protection happens)
A year-one equity chat over coffee will haunt you later.
Document:
vesting schedules and leaver provisions
role expectations and accountability
shareholder agreements / share classes (if relevant)
decision rights and board/authority structures
confidentiality and IP assignment
founder commitments (time, focus, restrictions)
Most disputes come from memory gaps, not malice.
Final Thoughts: Equity is not a Gesture — it’s Governance
Equity in year one isn’t about generosity.
It’s about building a business worth owning — and worth buying.
Done well, it attracts high-calibre people, keeps founders aligned, strengthens governance, and improves your future exit story.
Done poorly, it becomes a drag on growth, confidence, and long-term value.
Take your time. Be deliberate. And treat equity like what it is: the architecture of your future.
