March 29, 2026 | 9 min read
The Conversation Nobody Wants to Have
You and your friends have an idea. You are excited. You have been talking about it for weeks over beers or on group chats. Somebody bought the domain. Somebody started writing code. The energy is high and everything feels possible.
And then somebody asks the question: "So how are we splitting this?"
The room gets quiet. Everyone suddenly finds their phone very interesting. Because this is the conversation that can turn best friends into strangers if you handle it wrong. And most people handle it wrong because they try to avoid the discomfort entirely.
We are a group of friends from Tennessee who started Obsidian Clad Labs together. We have been through this exact conversation. Here is what we learned about splitting equity without splitting friendships.
Put Everything in Writing Before Any Code Is Written
This is the most important piece of advice in this entire article. Before you write a single line of code, before you register the LLC, before you buy the domain -- sit down and write out who is contributing what, who gets what percentage, and what happens if someone leaves.
It feels premature. The company is worth nothing right now, so why argue about percentages of nothing? Because the conversation is easy when the stakes are low. It becomes nuclear when there is real money on the table. You want to have this discussion when everyone is still friendly and reasonable, not when someone just got a job offer and wants to leave, or when a big customer signs up and suddenly the percentages matter a lot.
A handshake agreement is not an agreement. A text message saying "we will figure it out later" is a ticking time bomb. Get it on paper. It does not have to be a lawyer-drafted document on day one (though it should be eventually). Even a shared doc that all founders sign and date is better than nothing.
Vesting Schedules Protect Everyone
A vesting schedule means that equity is earned over time, not granted all at once. The standard in startups is four-year vesting with a one-year cliff. That means if someone leaves before a year, they get nothing. After the cliff, equity vests monthly or quarterly over the remaining three years.
This is not about distrusting your friends. It is about protecting the people who stay. Imagine you split equity three ways equally on day one. Six months later, one person gets busy with their day job and stops contributing. Without vesting, they still own a third of the company forever, while the other two are doing all the work. That breeds resentment faster than anything.
With vesting, the person who leaves early walks away with a small slice proportional to their time, and the remaining founders retain enough equity to keep building without feeling cheated. It is the single most important structural protection you can put in place.
This applies to everyone, including the person who came up with the idea. Ideas are worth very little. Execution is everything. The vesting schedule ensures that equity reflects ongoing contribution, not just who had the initial spark.
Membership Interest vs. Profits Interest
If you are forming an LLC (which we did and which many small SaaS companies do), there are two types of equity to understand: membership interest and profits interest.
Membership interest is actual ownership of the company. If you own 30% membership interest, you own 30% of the company's assets, profits, and decision-making power. If the company sells for a million dollars, you get 300 thousand.
Profits interest is a share of future profits and growth, but not existing company value. It is typically used for people who join later or who contribute in a non-founding capacity. If the company was worth zero when they joined and later sells for a million, they get their percentage of that growth. But if the company had existing value when they joined, their profits interest only applies to value created after their grant date.
This distinction matters when you bring someone on board after the company already has products, customers, or revenue. Giving membership interest to a new contributor means giving them a share of everything that already exists. Profits interest lets you reward their future contribution without diluting the founders' share of value they already built. It is more fair to everyone, and it is an important tool in your structuring toolkit.
The Operating Agreement Is Your Most Important Document
For an LLC, the operating agreement is the document that governs everything: who owns what, how decisions are made, what happens when someone leaves, how profits are distributed, and how disputes are resolved. Without one, your state's default LLC laws apply, and those defaults almost certainly do not match what you and your friends agreed on verbally.
Your operating agreement should cover at minimum: each member's ownership percentage, vesting schedules, capital contributions (cash or sweat equity), voting rights, how profits and losses are allocated, what happens if a member wants to leave (buyout provisions), what happens if a member dies or becomes incapacitated, how new members can be added, and how the company can be dissolved.
Yes, it is a lot. Yes, it feels overly formal when you are three friends with a laptop. But this document is the thing that prevents lawsuits. It is the thing that makes sure everyone is on the same page. And it is dramatically easier to write when you are all still on good terms. Pay a lawyer to review it if you can afford one. If you cannot, there are solid templates online, but customize them to your situation. Do not just fill in the blanks on a generic form and call it done.
Have the Uncomfortable Conversations Early
Here are the conversations that feel awkward now but will save your friendship later.
"What if one of us stops contributing?" Establish a minimum commitment level (hours per week, deliverables, whatever makes sense for your team). Define what happens to their equity if they fall below that level. This is where vesting saves you, but you should also discuss it explicitly.
"What if we disagree on a major decision?" Decide now how you will resolve deadlocks. Do you vote by ownership percentage? Does one person have final say on product decisions while another has final say on business decisions? Having a clear decision-making framework prevents arguments from becoming personal.
"What if someone gets a full-time job offer?" Can they stay on part-time? Does their equity change? Is there a buyout option? Life changes, and your agreement should account for that.
"What if the company makes money?" How will you distribute profits? Reinvest everything? Pay out quarterly? This sounds like a great problem to have, but disagreements about money distribution have ended more friendships than disagreements about equity splits.
Equal Splits Are Not Always Fair
The temptation with friends is to split everything equally to avoid conflict. Three founders, 33/33/33. It feels fair. It feels democratic. But equal is not always equitable.
If one person is writing all the code, another is doing part-time marketing, and a third contributed the initial idea but works a full-time job and can only help on weekends, a 33/33/33 split does not reflect reality. The person doing the most work will eventually resent it, and the person doing the least will feel entitled to a share they did not earn.
It is better to have an honest conversation about who is contributing what and split accordingly, even if the numbers feel lopsided. A 50/30/20 split where everyone feels it is fair will hold up much better than a 33/33/33 split where two people feel shortchanged. And remember, vesting means these percentages are earned over time, so if contributions change, you have a built-in mechanism to adjust.
The Friendship Comes First
At the end of the day, this is what we keep coming back to. The company might fail. Most startups do. But the friendship does not have to fail with it. The paperwork, the vesting schedules, the operating agreement -- none of that is about distrust. It is about making sure that no matter what happens with the business, everyone walks away feeling like they were treated fairly.
Do the hard work of having these conversations now. Write things down. Be specific. And then get back to building. Because the best part of starting a company with friends is that you actually enjoy the work, and no equity dispute should take that away from you.
Built by Obsidian Clad Labs -- a group of friends from Tennessee building software that protects people.
tags: saas, startup, webdev, beginners
Originally published at TeachShield Blog
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