Pitfalls in Startup Equity Setting

Typical Cases:

• AcFun: Investors forced the founder away, and seven CEOs were changed in succession.
• Zhen Kung Fu: The brother-in-law sent his brother-in-law to prison.
• Douguo Cuisine: The co-founder was forced to resign and relied on “WeChat Moments” to clock in.
• Chunyu Doctor: The founder passed away suddenly, what to do with the equity?

Core Views:

• Think about the worst result and write it in the agreement. Save trouble later. After the agreement is drafted, find a lawyer to modify it, and if necessary, spend money to find a lawyer to modify it.

• Team equity allocation, fundamentally, is to make the founders feel reasonable and fair from the bottom of their hearts during the allocation and discussion process, so that they can forget this allocation afterwards and concentrate on the company. This is the core, and it is also what founders easily overlook.

• Only when the founder honestly faces his own driving force and desires, can the entrepreneurial team that struggles with you with your youth easily build solid trust.

• Equity and option agreements, the most important thing is not the agreement with financial investors. Why do financial investors sign long investment agreements? Because financial investors are weak in corporate governance and later management, and hope to protect themselves through agreements.

• Technical partners: When looking for partners, choose carefully. Minority shareholders cannot be driven away later. At the same time, allocate their respective equity ratios. It is best for everyone to pay a little money. Those who pay will do things.

• In the early stage, except for financial investors, each shareholder should be responsible for a specific business sector of the company, and it should be agreed that if the sector does not develop well, the shareholder’s shares should be withdrawn. Appropriate premium can be given for withdrawal, or if they do not withdraw, the person in charge or the company will find a more suitable person in charge of the business sector, and transfer part of the shares to the newcomer. You have to talk in detail with technical partners, but business partners are not a big problem. Business partners know how to adapt, but technical partners do not. Important business partners cannot work part-time.

• Everyone must sign a non-compete agreement.

• When there are many shareholders, shareholding on behalf can be implemented: China’s domestic law has already recognized the legitimate interests of real shareholders, that is, even if the names of crowdfunding shareholders do not appear in the register of shareholders, as long as there is an agreement proving that the real shareholders are real contributors, their rights and interests are also protected. The best is to form a partnership.

• Sign a concerted action agreement. When there are disagreements on major company decisions, it can ensure that the company’s business continues to move forward.

• “Sleeping together” is an important way to maintain relationships: care more about the joys and sorrows and daily life of minority shareholders and colleagues. Help solve problems that can be solved.

• Old drivers: Be cautious about old drivers with industry resources participating in the company part-time, and prevent them from becoming shareholders, because although they have resources, they may not use them for you, and they also want to share results from the company, and it is troublesome to withdraw in the end.

• Valuation issue: Valuation not only involves how much money can be obtained, but also relates to the equity ratio.

• Board seats: How many seats to give to latecomers, you have to consider clearly, and even write it clearly in the first investment agreement. Board seats are odd numbers.

• For small company business, do whatever you want, and standardize it when it gets bigger.

• Setting ratio: What is a reasonable equity ratio, agree on it yourself.

• It is best not to reserve options: Let those who are working hard for the company see hope first, and make their equity look quite a lot. For options, distribute them when you meet awesome people.

• After the equity is divided, there must be a corresponding equity vesting agreement (Vesting). After the equity is divided, there must be a corresponding equity vesting agreement (Vesting), otherwise the allocation of equity is meaningless. This means that the equity is gradually cashed out to the founder according to the number of years/months the founder has worked in the company. The reason is very simple. Startups are made. If you do it: the equity that should be given to you should be given to you. If you don’t do it: you can’t give what should be given, because it should be left to those who really do it.

• The general practice is to cash out over 4 to 5 years. For example, cash out 25% after the first year of work, and then cash out 2% monthly.

• This is a protection for the startup and the team itself. No one can guarantee that several founders will work together for 5 to 7 years. In fact, the vast majority of cases are that some founders will leave for various reasons. The scenario I don’t want to see is that 2 founders worked hard for 5 years and finally achieved results. And an original founder who worked for 3 weeks and left, came back 5 years later and said that 25% of the company belonged to him.

Published at: Dec 24, 2024 · Modified at: Dec 11, 2025