Equity Splits for Startups: Why “Fair” Has to Be Flexible (Not 50/50) by Attorney Gaea Kassatly.

By Founder of GK Law Co. and Managing Attorney, Gaea Kassatly.

When founders come to me to form a new company, one of the very first questions is:

“How should we split the equity?”

Most default to something like 50/50, 60/40, or “a third each.” It feels simple, fast, and “fair enough” in the moment.

The problem?Your startup is about to go on a long, unpredictable journey, and that fixed split is based entirely on guesses about the future.

If the equity split is wrong, it becomes the lens through which everyone experiences success later. If it feels unfair, resentment will show up right when things finally start going well.

In this blog, I’ll walk you through:

• Why traditional fixed equity splits almost always backfire

• A more logical, contribution-based approach (often called a “slicing pie” model)

• How to think about fairness, control, and investors

• A practical checklist you can download and use when you’re splitting equity with co-founders

And of course: this is educational only, not legal advice. More on that at the end.

Why Fixed Equity Splits Cause Founder Drama

Most founders try to split equity by doing something like this in their heads:

My share = value of my contribution ÷ total value of the company

The problem? At the early stage:

• You don’t know the value of the company.

• You don’t know what everyone will actually contribute over time.

• You can’t predict who will stay, who will quit, who will get sick, or who will get fired.

So the “equity conversation” often turns into:

• Promises of what people say they will do

• Dreams of what the company might become

It’s “promises divided by dreams,” and it gets emotional very quickly.

Some classic fixed splits:

• 50/50 “because we’re partners”

• 51/49 “because it was my idea and I want control”

• 33/33/33 “because there are three of us”

Now imagine:

• You’re 50/50 with a co-founder. You do all the work. They drift away, barely show up, but still own half the company.

• You’re 50/50 and want to add a third person. Whose equity does that come from? Yours? Theirs? Both?

• Your CTO builds half the product, then passes away. Their spouse now owns half the company but can’t write a line of code. You’re legally stuck with a huge equity holder who can’t contribute.

When something inevitably changes—someone quits, underperforms, or life happens—one of two things is true:

1. Someone has more than their fair share, or

2. Someone has less than their fair share

No one is ever upset when they have more than their fair share.Everyone is upset when they have less than their fair share.

That’s where founder disputes, renegotiations, and expensive legal fights come from.

A Better Principle: Equity Should Follow Risk

Here’s the core idea I want you to walk away with:

Your share of the equity should mirror your share of the risk you actually took.

Risk = the real bets you made on the business.

Think of it like playing Blackjack with a friend:

• You both agree to split the winnings 50/50.

• At first, you each put down 1 chip. Great—equal risk, equal share.

• Then you’re out of chips, and your friend puts in 2 more chips to keep playing.

Now, total bet = 3 chips from your friend, 1 chip from you.

If you win, does a 50/50 split still feel fair?Of course not. Your friend took on 75% of the risk.

What’s actually fair is:

• You: 25% (1 out of 4 chips)

• Friend: 75% (3 out of 4 chips)

You can write whatever you want into your operating agreement, but contracts don’t magically make unfair splits fair. They just make them enforceable.

The same applies to startups:

• Every hour you work below market salary

• Every dollar you invest that isn’t reimbursed

• Every piece of equipment you bring in and don’t charge for

• Every relationship you leverage for sales

• Every idea you license or assign to the company

All of these are bets you’re placing on the venture.

Equity should reflect those bets.

The “Slices” Concept: Turning Contributions Into a Fair Split

To make this practical, many founders use a contribution-based framework (often called a “slicing pie” approach). It works like this:

1. Every contribution to the company is assigned a fair market value in dollars.

2. Those dollars are converted into fictional “slices” (like chips in our Blackjack example).

3. Your equity percentage at any moment is:

   Your slices ÷ Total slices

   
   

   

   
   

Over time, as people contribute more or less, join or leave, the model self-adjusts to stay fair.

Types of Contributions

You can contribute in two major ways:

1. Non-cash contributions

   • Time and effort (below fair market salary)

   • Ideas (protected IP with royalty value)

   • Relationships (e.g., sales commissions you’d normally earn)

   • Use of facilities, equipment, or space that you personally own

     
     

2. Cash contributions

   • Unreimbursed expenses (travel, software, supplies)

   • Direct cash investments

Each has a fair market value.

For example:

• If your fair market salary is $100,000/year (~$50/hour), and the startup pays you $0, then every hour you work is effectively a $50 bet.

• If the company pays you $20/hour, then you’re betting the remaining $30/hour, not the full $50.

• If you buy a plane ticket for the company for $1,000 and aren’t reimbursed, that’s a $1,000 bet.

The model then weights non-cash and cash differently to reflect their risk (often giving more slices for cash, because it’s already taxed, spent, and gone).

You track these over time (just like you track payroll and expenses), convert to slices, and calculate equity as:

Your slices ÷ Total slices

No psychic powers or financial projections required—just facts about who actually put what on the line.

When People Leave: Firing, Quitting & Fairness

One of the most emotionally charged issues in a startup is:

“What happens to equity when someone leaves?”

A contribution-based model handles this logically by tying it back to the idea of bets on the table.

Generally, there are four ways someone leaves:

1. Fired for good reason

   • Performance issues after fair warnings

   • Serious misconduct (harassment, theft, etc.)

2. Fired for no good reason

   • The team just doesn’t want to work with them, despite no real misconduct.

3. Resigns for good reason

   • Promises were broken

   • Duties or compensation changed materially

   • Hostile or unsafe environment

4. Resigns for no good reason

   • “I’m over it.”

   • “I don’t believe in the vision anymore.”

   • “I want to do something else.”

A fair rule set often looks like this:

• If you’re fired for good reason or quit for no good reason, you are effectively walking away from your bet.

  • Your non-cash slices (time, effort, etc.) are removed from the pie.

  • Your cash contributions can be treated like a loan (to be repaid later), but you don’t keep ongoing equity as if you stayed and kept contributing.

• If you’re fired for no good reason or you resign for good reason, your slices stay in the pie, and you share in future upside based on the bets you actually made.

This keeps everyone’s risk and reward in balance, even when relationships change.

“Baking the Pie”: When to Lock in the Cap Table

A dynamic contribution-based model is designed for the bootstrap stage—from idea to either:

1. Break-even (the company can pay market-rate salaries and expenses from revenue), or

2. A major priced funding round (e.g., a true Series A, not just an angel check or small SAFE).

At that point:

• The company can afford to pay going forward.

• New contributions don’t need to be “bets”—they can be compensated with salary, bonuses, or traditional stock options.

• You “bake” the pie: convert the slices into a fixed cap table and move forward with more traditional equity tools (options, RSUs, etc.).

Until then, a flexible model protects you from frozen, unfair splits while the company is still in survival mode.

LLC, C Corp, S Corp: Does This Work With My Entity?

High-level thoughts (U.S. focused, and not exhaustive):

• LLCs

  • Extremely flexible for early-stage contribution-based models.

  • Easier to customize allocation of profits, losses, and ownership.

  • Often simpler and cheaper to start with.

  • You can convert to a C Corp later when you’re raising serious capital.

• C Corps

  • Standard for venture-backed companies.

  • Can be adapted to use a contribution-based framework, but you’ll need careful structuring (especially around vesting and qualified small business stock (QSBS) issues).

• S Corps

  • Typically not ideal for this kind of flexible, evolving equity split.

  • The tax rules require knowing exact ownership upfront and paying “reasonable compensation,” which doesn’t fit well with a dynamic bet-based model.

The details can get technical and jurisdiction-specific. This is exactly where legal counsel (hi 👋🏽) comes in to help you implement the logic of fairness within the right entity.

What About Investors?

Investors don’t typically care how you split equity among founders as long as:

• The cap table is clean

• There are no hidden disputes or angry ex-founders

• They can understand who owns what and why

A contribution-based model is actually very investor-friendly because:

• It produces a logical, auditable record of who did what, when, and what they were promised.

• It reduces the risk of future founder litigation that might block a sale or funding round.

Common investor categories:

• Contributors taking personal risk (time, services, small amounts of cash)

  • These are “grunts” in the pie—they accumulate slices.

• Angels investing their own money in sub-“institutional” amounts

  • Often structured via convertible notes or SAFEs, which convert when you reach a priced round or funding milestone.

• Institutional investors (VCs, large funds)

  • Usually come in at the priced Series A or later.

  • By that time, your pie should be “baked” into a fixed cap table.

Bottom line: Done correctly, a fair, contribution-based split makes you more investable, not less.

Red Flags When a Co-Founder Rejects Fairness

There are three main reasons someone pushes back hard on a fair, dynamic equity model:

1. They don’t understand it yet.

   • They’re used to “rules of thumb” like 50/50 or “idea gets X%.”

   • This can usually be solved with education, examples, and a clear explanation.

2. They don’t want to learn it.

   • “Just give me my 10% and I don’t want to think about it.”

   • That may be a sign this person doesn’t want to engage with the business at a strategic level.

3. They do get it—but don’t want to play fair.

   • They’re trying to lock in more equity than their contribution justifies.

   • They see your desperation and want to take advantage.

In that third scenario, my advice is simple and blunt:

If someone refuses a fair, logical structure because it limits their ability to take advantage of you, don’t go into business with them.

Educational Purposes Only – Not Legal Advice

This blog is for educational and informational purposes only.

It is not legal advice, does not create an attorney–client relationship, and should not be relied on as a substitute for advice from your own lawyer.

Equity, tax, and entity-choice questions are highly fact-specific and depend on:

• Your jurisdiction

• Your company’s structure

• Your financing plans

• The specific terms you negotiate

Before implementing any equity-splitting model, please consult with a qualified attorney and, where appropriate, a tax professional.