Incorporator The Journal of U.S. Formation
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Editorial 8 MIN READ

Splitting founder equity in 2020: the remote-team rewrite

Thirty months after the last time we walked this, the benchmarks shift at the edges and the tax rules stay put

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 8 sections
  1. What a 2020 cap table looks like at formation
  2. The vesting schedule, still 4 and 1
  3. Why the 83(b) still matters, and matters more for remote founders
  4. Profits interests in an LLC, still the better tool if it fits
  5. The §199A footnote that C-corp founders still mostly ignore
  6. The buyout trigger, written before anyone leaves
  7. A 2020 rule of thumb
  8. Sources

plitting founder equity in 2020 is still three decisions: the percentage split, the vesting schedule, and the buyout trigger. What is different from the version we wrote in November 2017 is that a growing share of founding teams now meet on Zoom before they meet in a room, and the default assumption that a "co-founder" is someone you saw every day for six months has quietly stopped being true.

The tax mechanics have not moved. The benchmarks have, by a few points in the places it matters.

What a 2020 cap table looks like at formation

A two-founder C-corp at formation in 2020 still typically authorizes 10,000,000 shares of common stock and issues roughly 8,000,000 to the founders, leaving 2,000,000 in reserve for the option pool and early hires. The exact split between the two founders is the conversation that founders almost always want to skip and the one the lawyer will make them have.

The rough benchmarks have been stable since the last time we covered this. Y Combinator's standard advice, articulated in Sam Altman's "Startup Playbook" and reinforced across the current batch's guidance, is that early founders should split close to equally and that anyone arguing for a large disparity at formation is usually mispricing what comes later. The Kauffman Firm Survey, which tracked the 2004 cohort of new businesses through 2011 and remains the most-cited longitudinal data on founder-equity mechanics, found that uneven splits correlate with higher dispute rates without correlating meaningfully with better outcomes. A 50/50 or 55/45 split is the modal outcome for two founders who have been at it for less than a year; anything more skewed than 60/40 at formation, in the absence of a concrete reason (one founder is full-time and the other is not, one founder brought a working product, one founder raised the money), tends to be renegotiated within eighteen months or end the company.

Three-founder splits are where 2020 teams get themselves in trouble. An equal three-way split gets framed as "fair" and is almost never what the three founders actually want six months in. A 40/35/25 or 45/35/20 is honest about the fact that one person is going to end up running the company, and it is easier to discuss that in April than in October. The benchmark has not changed from 2017; what has changed is that remote teams discover the asymmetry later, because they cannot see each other choosing to stay late.

The vesting schedule, still 4 and 1

The standard founder-vesting schedule in 2020 is what it was in 2017 and what it was in 2010: four years, with a one-year cliff. Twenty-five percent of each founder's shares vest on the first anniversary of the vesting-commencement date, with the remainder vesting monthly (1/48 of the total) over the following three years. Every institutional term sheet we have seen at seed and Series A in the last twelve months assumes this schedule; diverging from it costs a negotiation you will lose.

Acceleration is the clause founders misread most often. Single-trigger acceleration (all unvested shares vest on a change of control) is aggressive and rarely granted; double-trigger acceleration (change of control plus termination without cause, or resignation for good reason, within a defined window) is the current market. Venture investors in 2020 will generally accept double-trigger for founders, sometimes partial (50% of unvested) rather than full. They will almost never accept single-trigger. If your term sheet offers single-trigger, read the rest of the document twice; it is usually a signal that the firm is not sophisticated at this stage.

The vesting-commencement date is negotiated. For a founder who has worked on the project for eighteen months before formation, the vesting clock can credit that time, reducing the effective cliff. This is not controversial and is worth asking for when it is true.

Why the 83(b) still matters, and matters more for remote founders

When a founder receives restricted stock subject to vesting, Section 83 of the Internal Revenue Code treats each vesting event as a taxable transfer at the fair market value on the vesting date, with ordinary- income tax on the spread between what the founder paid and that value. For a company that grows, the tax bill compounds as the stock appreciates.

Section 83(b) lets the founder elect to be taxed today, at formation value, on the full grant. If the founder paid the FMV (which at formation is usually the $0.0001 per share that matches the par value), the reported income is zero and the tax is zero. The election has to be filed with the IRS within 30 days of the grant. There is no extension, no cure, no "reasonable cause" exception; miss the 30 days and the window is closed for that grant.

We wrote the full mechanics of the 83(b) in January. The piece that matters for a 2020 remote team: the 83(b) has to be mailed, because the IRS does not accept it electronically, and the certified-mail receipt is the only proof you filed on time. A co-founder in one city cannot file the other co-founder's election, and an overnight-mail service is not a substitute for USPS certified mail with return receipt if the postmark is contested. Each founder files their own, each keeps a copy, and each gives a copy to the company's counsel.

The Tax Cuts and Jobs Act of 2017 did not change 83(b). It did not change the 30-day window. The post-TCJA commentary that suggested otherwise was about Section 83(i), the elective deferral for certain qualified-equity grants at private companies, which is a separate regime and does not apply to founder stock at formation. Do not let a blog post confuse you out of filing.

Profits interests in an LLC, still the better tool if it fits

If you are forming an LLC rather than a C-corp, the founder-equity conversation is structurally different. Under Subchapter K, an LLC taxed as a partnership can grant a "profits interest," which the IRS has treated as a non-taxable grant under Rev. Proc. 93-27 since 1993 and clarified under Rev. Proc. 2001-43 for interests subject to vesting. A profits interest entitles the holder to a share of future appreciation and future profits but nothing of the existing capital account on the date of grant; the safe harbor is conditioned on the interest not being for a substantially certain and predictable stream of income, the partner holding for at least two years, and the interest not being publicly traded.

In operational terms: a founder or early employee can be brought into an LLC with a 10% profits interest, pay nothing for it, owe no tax at grant, and have the economics align with a C-corp founder's restricted stock at a fraction of the paperwork. The 2001-43 clarification confirmed that vesting does not blow the safe harbor as long as the partnership and the service provider treat the partner as a partner from the grant date and the service provider files no §83(b) (because under Rev. Proc. 2001-43 the grant is not a §83 transfer in the first place).

Profits interests are underused in 2020, particularly by LLCs that took a C-corp-flavored investor's lazy advice to convert early. If your business is an operating LLC that will not raise priced venture rounds in the next eighteen months, the profits-interest structure is almost always a better founder-equity tool than conversion to a C-corp just to issue restricted stock. Convert when you have to, not before.

The §199A footnote that C-corp founders still mostly ignore

The TCJA added IRC § 199A, the qualified-business-income deduction, which lets owners of pass-through entities deduct up to 20% of qualified business income against their individual returns, subject to a wage-and-basis limit and a specified-service-trade-or-business phaseout. The deduction is scheduled to expire at the end of 2025 absent congressional action.

§199A does nothing for founders of a C-corp. The 21% flat corporate rate introduced by the same legislation gets cited as the counter- weight, and for a company that intends to retain earnings and reinvest, the C-corp math is close to a wash with a well-run pass- through. For a services business that will distribute its profits annually to its owners, it is not. The decision to form as a C-corp in 2020 rather than an LLC or S-corp should be about the financing path, not the tax rate, and a founder who is choosing C-corp because "the rate is lower" is almost always looking at the wrong half of the ledger.

This is the piece of post-TCJA equity planning that gets ignored most often, particularly by engineers forming holding structures around consulting income that will not raise outside capital. The C-corp is the wrong entity for most of them, and the equity-split conversation is downstream of that mistake.

The buyout trigger, written before anyone leaves

The third decision, and the one founders most want to defer, is what happens to the unvested and vested shares of a founder who leaves. Unvested shares are handled by the vesting schedule: they are repurchased at cost (the $0.0001 or whatever was paid) or forfeited. Vested shares are the harder question. A typical founder-stock-purchase agreement in 2020 gives the company a right of first refusal on transfers and, for a cause-based departure, a repurchase right at fair market value or at the lower of FMV and cost. Whether the lower-of clause applies to a founder terminated for cause varies by jurisdiction and by the company's counsel's appetite for the argument.

Remote-team formations make this clause load-bearing. A co-founder who moves to a different time zone, stops responding, and then surfaces six months later claiming they are still a founder is a known failure mode. Written buyout terms, signed at formation, close the argument before it starts. The terms do not need to be harsh; they need to be written down.

A 2020 rule of thumb

Two founders, 4-year vesting with a 1-year cliff, 83(b) filed within 30 days by certified mail, profits interests if the entity is an LLC, restricted stock if it is a C-corp, and the buyout language signed at formation. Anything fancier is a negotiation you have not yet earned.

Sources

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