I'm involved in a startup with some friends and we haven't formalized the equity split yet.
When is good practice to do something about equity and what do you start with
ie: short letter or formal docs
Can vesting take care of people that say they're working and not doing anything?
Always have a tentative agreement in place before you begin really working with each other. This may change as some people over / under perform, but it will be a total shitfight if you have the product ready, marketing in place and then argue about splits. Let's face it, we all think we are the most valuable and we all want a big %!
+1 to Neils link.
+1 to Neil and Alex (I can't give + until I get up there). Anup also basically took my points, so I'll give you the run-down on what we've done:
At our first full-team meeting (I'd met my co-Founders individually, but not all three of us together), we came to an informal agreement on the percentage split. However, I wanted to make sure they would do their work, so we also came up with a vesting plan.
I wasn't worried about the Developer, so he got 10% to start, and 5% for each of three milestones. The third part was the one who seemed like he might need some extra motivation, so we started him at zero, and gave him 5% for each of three milestones - each harder to attain than the previous one.
When I took this to our law firm during the incorporation process (S-Corp), it took some explaining, but eventually he was able to make the vesting work out.
ONE CAVEAT: By default, any shares that don't vest for the other partners revert to the company, which means they are split among the owners. If you want them to revert to YOU, make sure the lawyer puts in a clause that states that you have the right to purchase any unvested shares from the other partners, either at a certain time, or in the event that they leave the company. That way, you prevent your share from becoming diluted.
Shameless plug: that's the problem that my current startup solves. Here's how it works:
Notice how step #2 seems useless? That's because if everything goes perfectly, it won't matter, but if anything goes off-course, it will save your life (or at least your company.
A couple of things that it's great for:
The altneratives are worse: pay a lawyer to draft proper vesting founder agreements, and have to tweak them, for $500/hour, multiple times.
Founding your company is the one time where you don't want to "release early, release often".
Take a look at Noam Wasserman's Founder Frustrations blog, especially under the 'co-founders' section. He answers a lot of these questions.
In my experience, if all of you started at the same time, you need to put some formal agreement together to say how the equity split would happen and on what basis the split is based on.
Vesting is important to make sure the commitment remains. The other fact to keep in mind is that you would need to also document how future stock issuance would happen.
If you have money, this is best done through a consultant or lawyer or another person who has gone through similar startup experiences.