“First thing I ask is: how many of you are there, and what’s each person contributing?

Not ‘we’re partners.’ Specifically: Who’s putting in cash? Who’s putting in time? Who built the thing that already exists? Who’s got the relationships? Those are four different types of contribution, and they don’t automatically deserve equal equity.

Second thing I look at is the exit expectation. Do they want to build and sell in 5 years? Build a lifestyle business they run for 20 years? Go raise venture capital? Each of those points to a different entity type, different equity structure, different everything. Most founders haven’t thought about it. They just want to ‘start the business.’

Third is what I call the ‘uncomfortable questions.’ Have you talked about what happens if one of you wants out? What if one of you dies? What if one of you gets divorced and the spouse claims half their equity? What if you disagree on selling? Most of them haven’t talked about any of it. They’re excited. They’re friends. They think talking about the bad stuff is bad luck.

It’s not bad luck. It’s the job.”

“Equal equity splits with unequal contribution.

That’s the earliest sign. Two founders, 50/50, but one of them has been working on this for a year and the other just joined. Or one put in $100K and the other put in nothing. Or one’s going full-time and the other’s keeping their day job ‘for now.’

They do 50/50 because they don’t want to have the uncomfortable conversation. They think equal means fair. It doesn’t. Fair means proportional to contribution and risk. Equal just means nobody had to negotiate.

The problem doesn’t show up on day one. It shows up month 18 when one of them is burned out, working 70 hours a week, and the other is still ‘helping out when they can.’ The resentment builds. Then they’re in my office trying to unwind something that should have been built correctly from the start.

The other early warning: no vesting. Founders who own their equity outright from day one. Which means if one of them walks after six months, they take 50% of the company with them. For six months of work. I’ve seen it kill companies. Dead equity — shares held by someone who’s long gone — and the remaining founder can’t raise money, can’t bring in new partners, can’t do anything because half the cap table is owned by a ghost.”

“Two guys. College friends. Started a business together — one was the technical guy, one was the sales guy. Classic founder pair.

Handshake deal. 50/50. Never wrote it down. They figured they’d ‘deal with the paperwork later’ when the business was ‘real.’

Three years later, the business is doing $2 million a year. Now it’s real. And now the sales guy wants to bring in his brother as a third partner. The technical guy says absolutely not. They argue. The sales guy says, ‘Fine, I’m leaving, give me my half.’

His half of what? There’s no operating agreement. There’s no buy-sell provision. There’s no valuation method. There’s no nothing. It’s two guys yelling at each other about a $2 million company with no documentation.

Eighteen months of lawyers. $200,000 in legal fees. The business almost died. They settled eventually — but the amount of time, money, and friendship destroyed could have been avoided with a $3,000 operating agreement on day one.

I tell every founder that story. Some of them still don’t listen. They think it won’t happen to them. It happens to everyone eventually. The only question is whether you’re prepared.”

“For entity type, I ask three questions:

First: Do you plan to raise outside investment? If yes, you’re probably a C-Corp. Investors expect it, the tax treatment works for their funds, and the structure is built for it. If no, you probably don’t need the complexity and double taxation of a C-Corp.

Second: Do you expect profits in the first few years that you want to take out of the business? If yes, S-Corp or LLC might make sense — pass-through taxation means profits flow to your personal return without corporate-level tax. If you’re reinvesting everything, the entity math changes.

Third: How many owners and what kind? If it’s just you, simple LLC. If it’s you and partners with different contribution types, you need something that handles complex equity splits — probably LLC with a detailed operating agreement. If you’re planning to give equity to employees, you need a structure that accommodates that cleanly — usually means incorporating.

For equity splits, different questions:

What is each person contributing — cash, time, IP, relationships? How do you value each contribution type relative to the others? Is the time contribution historical (they already built something) or prospective (they’re going to work going forward)? What happens if someone stops contributing — do they keep their equity or does it vest? What’s the buyout mechanism if someone wants out?

Most founders have answered zero of these questions before they walk in. They’ve just decided ‘we’re 50/50’ or ‘we’re 60/40’ based on vibes. That’s not a structure. That’s a hope.”

“Five big ones.

One: No operating agreement. They form the LLC online in 20 minutes and think they’re done. They’re not done. They have an entity with no rules. No rules about voting. No rules about distributions. No rules about what happens when someone dies, gets divorced, wants out, or stops showing up. The entity exists but the partnership is undefined.

Two: Equal splits when contributions aren’t equal. I said it already. 50/50 feels fair. It’s not fair. It’s avoidance. And it creates resentment that poisons the company 18 months later.

Three: No vesting. Founders give themselves 100% of their equity on day one. Then one of them leaves after a year. Now you have dead equity on your cap table, and you can’t fix it without their cooperation — which you won’t get because they’re gone and they have no incentive to help you.

Four: Wrong entity for the plan. They form an LLC because it’s easy, then try to raise venture capital two years later and have to convert to a C-Corp — expensive, complicated, sometimes triggers tax events. Or they form a C-Corp because they saw it on a tech blog, then never raise money and pay double taxation for 10 years for no reason. Match the structure to the plan.

Five: Ignoring the D’s. Death, disability, divorce, disagreement, departure. The five D’s. Every operating agreement needs to address all five. Most founders don’t think about any of them. Then one of them happens, and they’re in my office asking how to fix something that can’t be fixed cleanly anymore.”

“A few.

Vesting: 4-year vest with 1-year cliff. Standard for a reason. Nobody earns their equity until they’ve been around a year. Then it vests monthly or quarterly over the remaining three years. Protects against early departure. If someone leaves after 6 months, they get nothing. If they leave after 2 years, they get half.

Cash contribution valuation: 1.5x to 2x multiplier. If someone puts in $100K cash and someone else is putting in sweat equity, the cash should be valued at more than just $100K worth of equity. Why? Because cash is certain. Cash is now. Sweat equity is a promise. I usually value early cash at 1.5x to 2x the nominal amount for equity purposes.

Time-based contribution: salary equivalent calculation. If a founder is going to work full-time for a year before the business can pay them, calculate what that salary would be worth. $150K forgone salary is a $150K contribution. Make sure the equity reflects that.

Entity selection: default to LLC, upgrade to C-Corp if needed. LLC is simpler, more flexible, cheaper to maintain. You can convert to C-Corp later if you’re raising institutional money. Don’t start with C-Corp complexity unless you know you need it.

Operating agreement complexity: minimum 15 pages. If your operating agreement is 3 pages, it doesn’t address anything real. The document needs to cover the five D’s, voting rights, distribution rules, transfer restrictions, and buyout mechanisms. That takes 15-30 pages depending on complexity. If someone hands you a 3-page operating agreement, throw it away.

The ‘what if you hate each other’ test. Before they sign anything, I ask: ‘If you hated each other a year from now, would this agreement protect both of you?’ If the answer is no, it’s not done yet.”

“Structure is for when things go wrong, not when things go right.

When things go right, you don’t need structure. You’re friends, you’re making money, everybody’s happy. You could run the business on a napkin.

But things won’t always go right. Someone will want out. Someone will get divorced. Someone will stop pulling their weight. Someone will die. Someone will get an offer to buy the company and one of you will want to take it and the other won’t.

That’s when structure matters. And you can’t build structure in a crisis. You can’t negotiate a fair buyout when one person is furious and the other is desperate. You can’t add vesting retroactively when someone’s already walked with half your equity. You can’t decide what the company is worth when each side has a financial interest in a different answer.

Structure is the conversation you have when everyone’s still friends. It’s the agreement you write when nobody thinks they’ll need it. It’s the protection you put in place before you know what you’re protecting against.

Every founder thinks the hard part is building the product or finding customers. It’s not. The hard part is building a partnership that survives success. Get the structure right, and you can focus on the business. Get it wrong, and the business won’t matter.”