Founder Agreements and Equity Structure
Before the first term sheet, the cap table is the only thing an AI company controls entirely. Vesting, an option pool and clean IP title are cheap to set at formation and expensive to retrofit under a deadline.
The cap table is decided in month one and revisited forever
Most AI companies do not fail on technology. They fail diligence on structures that were never designed: founders holding fully vested equity from day one, no pool reserved so the first investor demands dilution from the founders, IP created before incorporation with title still sitting with an individual, a departed co-founder holding shares nobody can recover.
Each of these is a fifteen-minute conversation at formation and a five-figure negotiation during a financing round — because at that point the counterparty has leverage and the company has a deadline.
What we do
- Founder agreement: equity split against contribution and role, decision rules, deadlock mechanics, departure and vesting terms, IP assignment
- Vesting and repurchase: four-year vesting with a one-year cliff, good-leaver and bad-leaver treatment, repurchase price formulas
- Option pool reservation: pool size at formation, where the pool sits, who bears dilution, top-up mechanics at later rounds
- Cap table clean-up: historical equity, nominee and holding arrangements, prior contributions, employee inventions
- IP title at formation: assignment of pre-incorporation work product, founder inventions, and rights created while still employed elsewhere
What is different for an AI company
- Technical contribution does not translate into a share ratio. Commits, model quality and accumulated data are not comparable contribution metrics. The workable approach is to bind equity to delivery: milestone-based vesting, rather than a one-off split at incorporation on “who is the strongest engineer”.
- Investors look first at whether control is clear. Equal splits, three-way deadlock and undisclosed nominee holdings all become pre-closing remediation items. Fixing concert-party arrangements, voting proxies and the path to disclosure matters more than the valuation conversation.
- Nominee holdings are unusually common in AI teams. University faculty stakes, work done during prior employment, silent partners — each creates a title defect. Disclosure timing, tax cost and departure repurchase belong in one document.
- The cap table must survive founder-level risk. Marriage, inheritance and personal debt all reach the shareholding. Pre-marital agreements, wills and pledge restrictions are low-cost, high-leverage arrangements.
- Model the dilution before granting. Option pools, convertible notes and later rounds stack up, and founder holdings can fall below key thresholds. Run the three-year path on a fully diluted basis before deciding this round’s grant.
Typical situations
Situation 1: A technical founder contributes “the algorithm” with no delivery or exit terms
One of three founders owns the model. The 30% stake is agreed orally, with no delivery milestones and no departure terms. Two years later he leaves and claims 30% in value; there is no repurchase clause and no valuation basis.
Our approach: treat a technology contribution like any other — vesting and milestones, unvested portions lapsing, vested portions repurchased on a formula, and assignment of the model made a condition of vesting.
Situation 2: An equal split that diligence requires you to fix
Three founders hold 33% each, and neither the constitution nor the shareholders’ agreement addresses deadlock. In Series A diligence the investor requires a clear controller and a decision mechanism; remediation means amending the constitution and re-signing the agreement, delaying closing by a quarter.
Our approach: designate one lead at formation, with the others following through a concert-party arrangement or voting proxy, and write deadlock-breaking rules into the constitution.
Situation 3: The model is registered to an individual, and the chain of title breaks
The core model’s software copyright is registered in the founder’s own name, with the company holding only a licence. Financing and algorithm filing both ask who the copyright owner is, and the investor requires assignment before terms.
Our approach: at formation, unify employee-invention, copyright and patent applicants under the company; where registration already sits with an individual, complete the assignment registration promptly and retain the consideration records.
Process and deliverables
| Stage | Work | Deliverables |
|---|---|---|
| 1 | Founder contribution and role mapping | Equity allocation model |
| 2 | Founding documents | Founder agreement + vesting and repurchase terms |
| 3 | Pool and platform design | Option pool plan + holding platform documents |
| 4 | IP title transfer | Assignment deeds + IP schedule |
| Ongoing | Cap table maintenance on new grants | Updated register + resolution records |
AI-specific deliverables
- Technology contribution and data-asset schedule: valuation basis, appraisal report and transfer documents, flagging assets not yet transferred.
- Account and asset ownership checklist: ownership of repositories, cloud accounts, API keys and training environments.
Frequently asked
Is a 50/50 split workable? It is workable if decision rules are written, because equal holdings plus no tie-breaker is a deadlock waiting for its first disagreement. Either give one founder a deciding vote on defined matters, or build an escalation mechanism. The split matters less than what happens when the two holders disagree.
How large should the option pool be at formation? Commonly 15%-20%, sized against the hiring plan through the next two rounds rather than against the current team. Reserving too little forces a top-up at the worst moment; reserving too much dilutes founders for equity that may never be granted.
Does vesting apply to founders? Yes, and it is the single most valuable protection on the cap table. Founders typically resist it because it feels like a statement of distrust; investors require it because the alternative is unvested value held by people who may leave.
What happens when a founder leaves? Depends entirely on what the documents say. With no clause, the departing founder keeps everything. With vesting and a repurchase right, unvested equity lapses and vested equity is bought back at a defined price. That difference is created at formation, not at departure.
How should technical and data contributions be documented? With a valuation basis, an appraisal where required, and transfer evidence. A licence without transfer leaves the core asset outside the entity and is treated as a diligence defect. How are algorithm contributions converted into equity? Only after the contribution has moved into the company: code, model and data ownership must be confirmed first. Unassigned technology can be licensed or deferred, not capitalised as equity.
Legal basis
- Company Law (2024 revision): capital contribution, equity transfer, shareholder rights, governance and resolution requirements
- Partnership Enterprise Law: limited partnership holding platforms, contribution and withdrawal
- Patent Law Art. 6: service inventions and the boundary with work created outside employment
- Copyright Law Art. 18: ownership of works created in the course of employment
- Civil Code, Contract Part: validity, breach and standard terms in founder agreements
Handover to later stages
This page covers the structure set at formation. The transaction itself — term sheet, SPA and SHA negotiation, liquidation preference, anti-dilution and investor due diligence — is handled under Equity Financing and Investor Terms. Where a pool is granted to employees, instrument design and tax treatment sit with Equity Incentives and Option Pool. Keeping the two apart matters: a formation defect cannot be cured by drafting a better transaction document.