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Equity is one of the most important aspects of a startup’s foundation. It defines who owns what, how responsibilities are distributed, and how future profits (or losses) are shared. Properly assigning and documenting founder equity early on prevents misunderstandings, strengthens investor confidence, and ensures legal compliance.

When to Assign Equity

Equity should be assigned as soon as the company is legally formed. The process and timing depend on the type of entity you choose:

For an LLC

•Equity is typically assigned after filing the Articles of Organization with the state.

•At this stage, founders should draft and sign an Operating Agreement, which details ownership percentages, rights, responsibilities, and profit-sharing arrangements among members.

For a C Corporation

•Equity is assigned after filing the Articles of Incorporation.

•During the post-incorporation setup, shares of stock are issued to the founders.

•This step should be documented through shareholder agreements, a cap table, and board resolutions to establish a clear record of ownership.

Where to Document Equity Assignments

Documenting equity is essential not only for clarity among founders but also for regulatory compliance and future fundraising efforts. The main documents include:

•Operating Agreement (LLCs): Defines ownership structure, roles, and responsibilities.

•Shareholder Agreements (C Corporations): Outlines how shares are distributed and managed.

•Cap Table: A dynamic record of ownership percentages, shares issued, and equity distribution.

•Board Resolutions: Formal documentation of board approval for issuing shares and equity-related decisions.

Why Proper Equity Documentation Matters

•Prevents disputes between co-founders

•Builds trust with potential investors and partners

•Provides a transparent framework for ownership and responsibilities

•Ensures compliance with state and federal regulations.