Structure - Vesting and Dividing Equity

At Freeman Lovell, the success of entrepreneurs and small businesses is our goal. Whether you are a tech founder, real estate investor, or creative professional, our business lawyers are here to help you avoid common legal traps and take the right risks to take your business from idea to exit.

A common question our business attorneys get is how to split up equity between the founders of your business. This article will discuss: (1) a formulaic way to divide up equity among your founders, and (2) how to determine how to properly use vesting.

Think Long Term

Before we jump in head first on equity splits and vesting, I want to discuss several guiding principles to keep in mind as you figure out your equity split. The first is to think long term. Imagine your business in 10 years after ups and downs but plenty of growth and success. How much is your business worth? One million, fifty million, or an easy billion? When you imagine your business at what it could be and not what it is when you start, it’s easier to understand how much equity is 10%, 20%, or more. It’s also easier to understand why vesting, even for founders, is so important.

The Success of the Business Is The Big Picture

The next guiding principle is to think of your business as a living, breathing organization more important than the owners. Keeping that in mind, your business should be divided up and equity reserved to account for future growth, future needs, and future success.

Dividing the Pie

Dividing up equity is much like baking and cutting up a pie. You should consider several ingredients when dividing up equity between founders.

Ingredients

Typical ingredients of starting any successful business are the following: the idea, the cash & property, the connections, the marketing, and the services and execution. Like the ingredients in a recipe, you should allocate a percentage of the cap-table pie to each of them.

, The Idea

A percentage of the equity should go to the founder or founders that had the idea. In my opinion, this ingredient should make up between 10% and 20% of the company. The idea is also a part of the business that is being fully contributed from the business’s outset and should not be attached to any vesting requirements.

, The Cash & Property

If any of the founders are contributing cash or property, either tangible or intellectual property, those founders should receive a percentage of fully-vested equity in the business. This amount will vary significantly based on the amount of cash or the value of the property contributed.

, The Execution and Services

The long, hard work to build the foundation of a business that can scale is not trivial and should be compensated accordingly. In my opinion, I believe that majority of a company should go in this bucket. Of course, you don’t want to give all the equity up for a promise of hard work, and this is the area where I see the most mistakes made. I have seen instances when entrepreneurs give a cofounder a considerable amount of fully-vested equity. Then the partner just stops working, leaving you stuck with a deadweight co-founder and no way to reduce their equity accordingly. Don’t let this happen. All equity you allocate to a founder for the services they will provide should be subject to vesting.

, The Expertise

Some businesses will need specific skills or unique expertise to be successful. Sometimes this required expertise will be technical, professional, or experience-based. Regardless, there is value in this expertise, and you should compensate it with equity. Typically, this expertise will need to be applied over time for it to be valuable, and for that reason, this equity should not be vested upfront but slowly over time.

The Connections

In some circumstances, you may have a person that brings significant industry connections or influence that you would like to be part of your founding team. There is real value behind these connections for the long term success of your business. A founder that puts those connections to work and jumpstarts a business should be compensated with equity accordingly. Like expertise, because these connections will need to be nurtured consistently over time. For that reason, this equity should also vest over time.

Reserved Equity for Future Executives and Employees

Now that you have figured out how to divide up equity between founders, you need to take another look at the long-term vision for the company. Are you going to need to grant more equity to employees, future executives, employees, or other key partners? If you answer yes to this, you will want to set aside a pool of equity for them. You may need to give them sufficient equity to attract that kind of talent. Companies that plan on using equity to attract employees will often set aside an additional 10% to 20% of the company’s equity to grant when bringing on others in the future.

Control Considerations

As you go through and divide up the pie considering the above ingredients, one other consideration that you need to consider is how the divided up equity will affect the owners’ decision-making. You should think through how the percentages would affect decisions both on a majority and supermajority basis. Founders are regularly giving themselves amplified voting rights by putting in their operating agreements or bylaws that the founders have two votes or more per share and everyone else just one vote per share.

Vesting

Why Vesting

As we touched on above, vesting is very important. Vesting allows you to control the ownership of equity over time to ensure that a founder, employee, or advisor keeps acting in the company’s best interest. Vesting ensures that if they lose interest and stop providing services, you can claw back some of the equity that they didn’t earn by failing to provide services for the length of time you expected for the amount of equity granted.

So why not just give out equity grants every year or at the end of the services are provided? Well, it comes down to taxes. If you make separate grants at the end of each year, the grantee will need to pay taxes on the business’s increasing value, or the option or profits interest strike price would be higher and higher each year. If you grant them a larger percentage early in the company when the company is worth very little, with a long term vesting schedule, that equity owner can file an 83(b) election and pay very little tax.

Time-Based vs. Performance-Based

There is a regular debate of whether to use time-based vesting or performance-based vesting. For me, nine times out of ten, err on the side of time-based. Here are the basics of both:

Basics of Time-Based Vesting

The industry standard is the 4-year vest, one year cliff. This structure has nothing to do with clothing and even less to do with geography. What this means is that the equity granted is going to vest over four years. So what in the world is the one-year cliff? The one-year cliff means no equity vests until the grantee provides a full year’s services to the company. An employee who has this vesting schedule is required to stay for all 12 months of the first year to get anything, and then after that, equity will vest monthly. This vesting structure is a mechanism to prevent short-term employees from having any long-term interest in the company. As a business lawyer, I like this vesting structure because it is straightforward and easy to track and calculate. I like this as a business attorney because it is difficult to dispute the vesting calculation. There is nothing a corporate attorney hates more than a dispute over a contract that they drafted.

Basics of Performance-Based Vesting

There is no industry standard when it comes to performance-based vesting. Generally, performance-based vesting is based on the company or employee meeting some financial or numerical criteria. Performance-based vesting sounds fine and good, but is it? Here are three top-of-mind reasons I don’t like this type of vesting:

  1. Accounting for numbers and dollars can easily be, and are, regularly disputed.
  2. Performance-based vesting doesn’t take into account environmental factors that can affect financial performance.
  3. Employees and founders often change roles as the business grows and changes, and the financial or numerical metrics may no longer make sense or incentivize the right things.

One type of performance-based vesting that I am okay with is when hourly and monetary contributions are predetermined, tracked, and calculated for the founders. Performance-based vesting is a good structure for businesses made up of founders who have other full-time jobs. How this works is that you grant 1,000,000 units/shares, and each year, 200,000 of those units/shares can vest based on the hours and dollars contributed by the grantee.

Conclusion

If you take anything away from this, I hope it is this: Think long term. Use vesting with any amounts of equity that the grantee should earn over time. Give fully vested equity for the business concept and actual cash and property contributed.

If you want some help getting this figured out for your business, don’t hesitate to contact one of Freeman Lovell’s business attorneys. We can help you.

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

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Demystifying FMLA

By Adrienne Langmo • September 12, 2025
If you're working for — or running — a business with under 50 employees, the Family and Medical Leave Act (FMLA) might seem like a distant federal regulation. But for eligible employees and covered employers, it’s a powerful tool for balancing work and life during major health or family events. Here's what you need to know. 🧩 The What The FMLA is a federal law that allows eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for specific family or medical reasons, including: The birth or adoption of a child Caring for a spouse, child, or parent with a serious health condition Recovering from a serious health condition themselves Certain military-related family needs The leave can be taken intermittently, in blocks, or in one long swath. During FMLA leave, employers must maintain group health benefits as if the employee were still working. When the leave ends, the employee is entitled to return to the same or an equivalent position. 👥 The Who FMLA is mandatory for employers with 50 or more employees within a 75-mile radius. So, if your business has fewer than 50 employees at a given location, you’re not legally required to offer FMLA leave —but you can choose to adopt similar policies voluntarily. Employees must also meet FMLA eligibility criteria: Worked for the employer for at least 12 months Logged at least 1,250 hours in the past year Work at a location with 50+ employees within 75 miles *State employees may have additional benefits provided under state law. Here, we’re discussing private employers and employees. 🛠️ Employer Takeaways Treating employees appropriately during their FMLA leave and upon their return can present some hurdles for employers and coworkers, particularly when an employee has been on leave for some time and, e.g., projects or programs have evolved in their absence. You don’t have to navigate these situations alone; we can provide your team with the tools and information necessary to smoothly navigate the full FMLA process and avoid any sticky FMLA retaliation or interference claims. And, even if you’re not legally bound by FMLA, offering comparable leave can be a smart move. It builds trust, boosts retention, and shows you value your team’s well-being. Consider crafting a voluntary leave policy that mirrors FMLA protections, including: Clear eligibility rules Defined leave duration Job protection guarantees Coordination with paid time off or disability benefits For small businesses, this means you have flexibility—but also responsibility to communicate policies clearly. Want to overhaul those policies or craft great messaging to your team, give us a call! We’re here to make leave policies less painful and more practical. 📣 Employee Takeaways If you work for a small Utah employer, ask about your company’s leave policies. While FMLA doesn’t require you to use your accrued leave during your FMLA leave, it allows your employer to write into its policy a requirement that you do so. Make sure you read that policy! And, even if FMLA doesn’t apply, your employer may offer benefits similar to FMLA. If you’re dealing with a serious health issue or family emergency, document your situation, give notice as early as possible, and follow internal procedures. Need help understanding those procedures or your rights as an employee? We got your back! ⚖️ Final Thoughts FMLA is more than a legal acronym—it’s a lifeline for employees facing life’s biggest challenges. For Utah employers, understanding the law and choosing to offer similar protections can set your business apart. Whether you're an HR manager, CEO, or a team member, knowing your rights and responsibilities helps everyone navigate leave with clarity and compassion.

Moonlighting, Side hustles, and Non-Competes

By Adrienne Langmo • September 3, 2025
So, you’ve got an employee that wants to teach a night class? Drive for a ride share? Pursue a passion project on the side? That’s great…. Right? You can ensure it’s great for both you and your employee by entering a non-compete, non-solicitation, non-disparagement, and/or non-disclosure agreement and setting clear workplace boundaries . Non-Compete Agreements can help employers do damage control when an employee wants to branch out. Non-competes alone are limited, but when properly crafted and paired with the other agreements listed above, they can provide peace of mind and protection to employers. Utah law takes a close look at these agreements when it comes to enforceability, so don’t go it alone when it comes to crafting one. Boundaries Set boundaries with your employees on the use of their time, your equipment, and your company’s other resources like client lists or IP. And pay close attention with remote or telework employees where boundaries may be squishier. Here’s some examples where lines may get blurred: Can the employee use the office printer, or their allotted printing budget for their teaching gig? What if it’s just a couple sheets of paper? What if it’s their 100-page course outline? Maybe. Do you have an equipment policy that allows employees minor personal usage of the office equipment? Does it define “minor”? Might you want to update that policy if it doesn’t provide the clarity you need? We can help! Can the employee pick up a ride share client in the company vehicle while they’re out running an errand for the company What if it’s their personal vehicle? What if the trip is along the way, no deviation? Definitely not the company vehicle for insurance purposes of carrying a random person around. But otherwise, this raises the charmingly titled legal doctrine of “frolic and detour” where it is much less messy in terms of liability (for accidents, etc.) if the employee does not engage in personal errands while on the clock, when they’re supposed to be completing your company’s business. No double dipping. No frolicking, as tempting as frolicking sounds. Can they email one of the company’s clients with a question that’ll help them move things forward on their side project? Generally, probably not, especially if you have a non-solicitation agreement in hand. But, it may depend on more details than this scenario offers. When in doubt, talk about it with your employee, get an idea of what their end game is, and give us a call if you need a sounding board. Need help handling questions like these, updating policies, or putting together a non-compete agreement? We can help!

Beneficial Ownership Rules

December 28, 2023
Starting January 1, 2024, a new rule took effect requiring all registered legal entities, including limited liability companies and corporations, to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). We wanted to give you a heads up about the rule and give you as much information about what it means to you. What is the rule? The rule, which is called the Beneficial Ownership Information Reporting Requirements (BOI Rule) , comes from the Corporate Transparency Act, which was passed by Congress in 2021. This law created the BOI Rule with FinCEN as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other deceitful ownership structures. Under this new law, FinCEN will permit Federal, State, and local officials to obtain ownership information for authorized activities related to national security, law enforcement, and intelligence. When does the rule take effect? And when do I have to submit a report? The BOI Rule took effect on January 1, 2024 . If your company existed before January 1, 2024, you must file its initial beneficial ownership information report by January 1, 2025 . If your company is formed or registered after January 1, 2024, you must file its initial beneficial ownership information report within 90 days after receiving actual or public notice that its creation or registration is effective. If any beneficial ownership information changes, you will have 90 days from the day of the change to file an updated or corrected report with FinCEN. What if I don’t file a Report? According to FinCEN: “The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.” What do I need to include in the report? The BOI Rule requires that all entities report information about the company, each individual with substantial control over the entity, and each beneficial owner. What information is required to report about the entity? Full legal name of your company and any DBAs names; Complete current street address for your company's principal place of business (P.O. boxes will not be accepted); The jurisdiction of formation or registration; and Tax identification: IRS tax identification number (TIN) and employer identification number (EIN). What information is required to report about the controlling individuals and beneficial owners? The individual's legal name; Individual's date of birth; Individual's residential address; and A unique identifying number from an acceptable identification document (such as an unexpired driver's license, passport, identification document issued by a State or local government or Indian tribe) and the name of the issuing state or jurisdiction. Who is considered to have substantial control of the entity? Examples of an individual that exercises substantial control over the entity are: An individual is a senior officer (President, CEO, CFO, COO, Manager, or other office who performs a similar function); An individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company; An individual is an important decision-maker for the company; or An individual has any other form of substantial control over the company. Who is considered a beneficial owner? A beneficial owner is an individual that owns or controls at least 25% of the entity’s ownership interests. This includes individuals that indirectly own or control 25% of the ownership interest. For example, if Joe is a 50% owner of Parent LLC, which in turn owns 50% of Subsidiary Corp, then Joe beneficially owns 25% of Subsidiary Corp (50% of 50% = 25%). What type of entities will be required to file a report with FinCEN? All domestically formed entities and foreign registered entities in the USA are required to file a report. Types of entities include corporations, limited liability companies, limited partnerships, general partnerships, and any other entity registered with a state Secretary of State or Division of Corporations or other similar office. There are some types of companies that are exempt from the reporting rule, and in general they are companies that already have to report beneficial ownership to another federal agency. The 23 exemptions listed by FinCEN are: Securities reporting issuer, Governmental authority, Bank, Credit union, Depository institution holding company, Money services business, Broker or dealer in securities, Securities exchange or clearing agency, Securities exchange or clearing agency, Other Exchange Act registered entity, Investment company or investment adviser, Venture capital fund adviser, Insurance company, State-licensed insurance producer, Commodity Exchange Act registered entity, Accounting firm, Public utility, Financial market utility, Pooled investment vehicle, Tax-exempt entity, Entity assisting a tax-exempt entity, Large operating company, Subsidiary of certain exempt entities, and Inactive entity. Can you help me with my company’s report? Yes! We are happy to help prepare and file your company’s BOI Rule report with FinCEN before the December 31, 2024 deadline. We offer a flat-fee service that is discounted based on how early you pay and submit your information. Sign up for our BOI Rule report service HERE. We also know that some situations can be complicated, so please feel free to ask us any questions regarding compliance with the beneficial ownership interest reporting requirements for your company by emailing teamjosh@freemanlovell.com .