The equity structure of an AI startup determines how far the team can go. A sound structure keeps founders in control through several financing rounds; a poor one can collapse under an equity dispute before Series B.
1. Allocation: how much each role should hold
Typical reference ranges
| Role | Typical range | Notes |
|---|---|---|
| Core founder | 40%–60% | Control should be preserved; no less than 30% before Series C |
| Technical co-founder | 10%–20% | Depends on joining time, technical barriers, track record and scarcity |
| Early investors | No more than 20% | Common ceiling at angel and seed stage |
| Part-time contributors and advisers | No more than 5% | Should not exceed a full-time founder |
| Employee option pool | 10%–20% | For employee incentive and future financing |
Allocation principles
- The core founder must retain control — combined holdings of over 50% are advisable, and no less than 30% before Series C
- A technical co-founder’s equity should track contribution — the core barrier for an AI company is its algorithms and models, so a technical co-founder should not hold less than 15%
- Cap equity for part-time contributors — no more than 5%, and vesting is mandatory
- Reserve an option pool — at least 15%; reserving before a round avoids the additional dilution that later issuance imposes on founders
Common mistakes
| Mistake | Consequence | Correct approach |
|---|---|---|
| Three founders splitting 33.3% each | Deadlock, with no controlling party | One core founder holds over 50% |
| Giving a technical co-founder 5% | Loss of core technical staff | At least 10%–15% where technical barriers are high |
| No option pool | Forced issuance at financing, with extra dilution for founders | Reserve 15%–20% before financing |
| Giving an adviser 10% | An inactive adviser holds substantial equity | Cap advisers at 5%, with vesting |
2. Vesting: preventing early departure from taking equity away
The standard four-year vesting with a one-year cliff
Market standard:
| Period | Vesting progress | Notes |
|---|---|---|
| Months 1–12 | 0% | Cliff period, with no vesting |
| End of month 12 | 25% | One quarter of the total grant vests at once |
| Months 13–48 | About 2.08% per month | The remaining 75% vests in equal monthly instalments |
| End of month 48 | 100% | Fully vested |
Example: founder A is granted 60% of the company subject to four-year vesting with a one-year cliff:
- End of year one: 15% vested (60% × 25%)
- End of year two: 30% vested (60% × 50%)
- End of year three: 45% vested (60% × 75%)
- End of year four: 60% vested (100%)
Key terms
Departure:
- Departure within twelve months: no equity vests at all
- Departure after twelve months: the vested portion is retained and the unvested portion is repurchased by the company
Acceleration:
- Change of control, such as an acquisition: partial or full acceleration may be agreed
- Major milestones, such as completion of Series B: acceleration may be agreed
- Termination without cause: accelerated protection may be agreed
Repurchase of unvested equity:
- The company may repurchase unvested equity at cost
- Vested equity is usually repurchased at fair valuation or an agreed price
3. Designing the option pool
Pool size
| Financing stage | Recommended reserve | Notes |
|---|---|---|
| Seed | 10%–15% | Covers the early core team |
| Series A | 15%–20% | VCs usually require a reserve for later hiring |
| Series B | 10%–15% | Adjusted according to grants already made |
| Series C and beyond | 5%–10% | Mainly for executive incentive |
Conditions of grant
- The employee joins and signs an employment contract
- The company or the board approves the grant
- Performance targets or milestones are met, where applicable
- Confidentiality, non-compete and intellectual property assignment requirements are satisfied
- The vesting schedule is met
Managing the pool
- The pool is not fixed and may be adjusted across financing rounds
- Reserving the pool before financing dilutes founders, which must be factored into valuation negotiation
- Equity repurchased on departure returns to the pool for later grants
- Before granting, specify the recipient, quantity, exercise price, vesting, repurchase on departure and tax liability
4. The founder agreement: twelve core terms
| No. | Term | Key content |
|---|---|---|
| 1 | Roles and duties | The respective duties of CEO, CTO and COO, and full-time or part-time arrangements |
| 2 | Equity allocation | Shareholdings and the reserved option pool |
| 3 | Vesting | Vesting for all founder equity, to prevent early departure |
| 4 | Contributions | Record cash, equipment, IP and other resources contributed |
| 5 | Decision-making | Major matters decided by a founder meeting or shareholders’ meeting, with voting rights specified |
| 6 | Transfer restrictions | Restrictions on transfer to third parties and rights of first refusal |
| 7 | Non-compete and confidentiality | No competing business, and the confidentiality period |
| 8 | IP ownership | Code, models, algorithms and data relating to founders belong to the company |
| 9 | Dispute resolution | Negotiation, mediation, then arbitration or litigation |
| 10 | Repurchase mechanism | Repurchase on exit, departure or breach |
| 11 | Anti-dilution and pre-emption | Principles to be refined in the shareholders’ agreement |
| 12 | Remuneration and distributions | Early-stage pay, adjustment mechanism and profit distribution rules |
Term 8, IP ownership, deserves particular attention in AI companies:
- Whether code, models and algorithms developed by founders before incorporation belong to the company
- Whether IP created during a founder’s previous employment may give rise to ownership disputes
- Whether use of open-source models affects IP ownership
- Ownership of and rights to use training data
5. Calculating dilution
The basic formulas
Post-money valuation = pre-money valuation + amount raised
Investor shareholding = amount raised ÷ post-money valuation
Founder shareholding after dilution = prior shareholding × (1 − investor shareholding)
A single round
| Item | Figure |
|---|---|
| Pre-money valuation | RMB 50 million |
| Amount raised | RMB 10 million |
| Post-money valuation | RMB 60 million |
| Investor shareholding | 10 ÷ 60 = 16.7% |
| Founder’s prior shareholding | 70% |
| Founder’s shareholding after dilution | 70% × 83.3% = 58.3% |
Dilution across several rounds
| Round | Percentage sold | Founder shareholding | Notes |
|---|---|---|---|
| Initial | — | 70% | Core founder |
| Seed | 15% | 59.5% | 15% sold; prior holding × 0.85 |
| Pre-A or A | 18% | 48.8% | 18% sold; × 0.82 |
| Series B | 15% | 41.5% | 15% sold; × 0.85 |
| Series C | 12% | 36.5% | 12% sold; × 0.88 |
The conclusion: after four rounds the founder falls from 70% to about 36.5%. Where an option pool is also reserved before each round, adding roughly 2%–3% dilution each time, the final holding may fall below 30%. A combined founder holding of no less than 25% before IPO is advisable.
6. Non-compete: protecting an AI company’s core assets
Who is covered
Under the Compliance Guidelines for the Implementation of Non-Compete Restrictions by Enterprises:
- Senior management
- Senior technical personnel
- Other personnel subject to confidentiality duties
Core technical staff at AI companies typically hold algorithms, model architecture, training data, engineering systems and commercial opportunities, so non-compete restrictions are highly relevant.
Core terms
| Term | Legal requirement | Practical recommendation |
|---|---|---|
| Scope of personnel | Senior management, senior technical staff and those with confidentiality duties | Cover algorithm engineers and those responsible for model training |
| Duration | No more than two years | Two years for core technical staff, one year for ordinary technical staff |
| Territory | Based on actual business and competitive relationship | Not excessively broad; the main areas of competition |
| Compensation | No less than 30% of the average monthly wage over the twelve months before departure | 50%–60% is advisable to strengthen enforceability |
| Liquidated damages | No statutory cap | Three to five times total compensation |
| Exceptions | Personnel who only hold general knowledge and skills | Should not be included |
Points to note
- The restriction must be signed before departure, or agreed during employment
- Where the company does not pay compensation, the restriction may lapse
- Where liquidated damages are excessive, a court may reduce them
- Employees holding only general industry knowledge and skills should not be included
7. Tax planning for equity incentives
Listed companies
Under the policy extended by the Ministry of Finance and the State Taxation Administration in 2023 and running to 31 December 2027:
- Equity incentive income is not consolidated with comprehensive income for the year and is taxed separately under the comprehensive income rate table
- Formula: tax payable = equity incentive income × applicable rate − quick deduction
- A 2024 announcement permits payment in instalments within 36 months from the exercise date, subject to filing
Unlisted companies
- Where the conditions for deferred taxation are met, tax may be paid on disposal
- AI companies generally need to specify the incentive instrument, grant conditions, vesting, exercise price, repurchase rights and tax liability
- Complex cases should be modelled by a tax adviser on a case-by-case basis
8. Lessons from real cases
Case one: the Dobot IPO equity dispute
Event: shortly before Dobot’s IPO, co-founder Song Tao reported that the prospectus concealed a substantial equity dispute, with a difference of nearly 47 percentage points. Root cause: an early oral agreement was never reflected in the business registration. Lesson: equity proportions must be confirmed in writing at an early stage and reflected in the business registration; oral agreements are ineffective.
Case two: a partners’ equity dispute
Event: a partner at an AI company left amid a disagreement over whether the holding was 15% or 5%. Root cause: an oral promise was never put in writing. Lesson: equity arrangements for core technical staff and co-founders must be documented and subject to vesting.
Case three: the Seer Intelligent partner dispute
Event: a partner alleged that other shareholders had impaired company value through a chain of equity transfers, and claimed RMB 51.21 million. Outcome: the court did not support the claim. Lesson: a claim requires a written agreement, business registration, capital contribution evidence, contribution records and a complete evidential chain.
Frequently asked questions
Q: When should founder vesting be put in place? A: At incorporation. Where equity has already been allocated without vesting, a supplementary provision in the shareholders’ agreement before the next round is advisable.
Q: Should the option pool be created before or after financing? A: Before. A pool created before financing dilutes all shareholders proportionately; one created afterwards may require additional issuance and extra dilution for founders. VCs usually require a 15%–20% reserve before financing.
Q: May non-compete compensation be withheld? A: No. Where compensation is not paid, a court may hold the restriction invalid. A monthly payment of no less than 50% of the average wage before departure is advisable.
Q: Can the company repurchase vested equity after a founder leaves? A: A repurchase right may be agreed in the founder agreement, usually at cost or at a discount to fair valuation. Without such a provision, the company has no right to compel repurchase of vested equity.
Q: At what stage should an AI startup instruct counsel on equity structure? A: As early as possible. The best time is at incorporation, and the next best is before the seed round. Restructuring at Series A is substantially more costly and difficult. See founder agreements and equity structure services.
This article is prepared on the basis of the Company Law, the Compliance Guidelines for the Implementation of Non-Compete Restrictions by Enterprises and the equity incentive tax policies of the Ministry of Finance and the State Taxation Administration. For assistance with equity structure design for an AI company, please contact Geason Law Offices.