How should two founders divide equity in a Pakistani startup?

Two founders setting up a Pakistani startup should not assume that a fifty-fifty equity split is necessarily fair, nor that unequal shareholding means unequal commitment. The appropriate allocation depends on capital invested, intellectual property contributed, working responsibilities, risk, experience and the founders' future obligations. Equity represents continuing economic and governance rights in a company. A decision made at incorporation can become difficult to unwind once an investor, employee or other shareholder has acquired rights.

The practical solution is a documented allocation supported by a realistic governance and vesting arrangement, reflected in the company's statutory records. A handshake expressing that each founder owns half of the business is inadequate if the company later issues a different number of shares or one founder leaves after three months.

Decide what each founder is contributing

Prepare a schedule of cash investment, existing technology, customer relationships, equipment, personal guarantees, time commitments and key deliverables. An idea alone should not automatically be valued at the same amount as commercial software, significant capital and two years of full-time work. Conversely, the person who contributes most initial cash may not necessarily deserve permanent operational control if the other founder carries the principal execution responsibility.

Contributions must be valued sensibly and documented. A founder assigning existing software should prove title and identify prior collaborators or employer claims. If one founder supplies a shareholder loan rather than equity, the arrangements should distinguish repayment rights from ownership percentages.

Equal ownership and the risk of deadlock

A fifty-fifty split can express genuine equal partnership, but it creates a governance challenge when the founders fundamentally disagree. The board composition, voting thresholds, reserved matters and shareholders' agreement need a workable method for resolving deadlocks. It is unsafe to assume a company can simply carry on because each director believes the other should compromise.

Possible mechanisms include escalation, mediation, agreed casting-vote arrangements where lawful, a limited buy-sell mechanism or structured separation. The chosen mechanism must work with the Companies Act, 2017 and articles of association. A badly drafted 'shotgun' clause can advantage a wealthy founder over a cash-constrained one even where the dispute is genuine.

Vesting ties ownership to future contribution

A founder may receive an initial entitlement to shares while agreeing that unearned economic rights are subject to defined repurchase or transfer mechanisms if the founder departs early. Vesting provisions should specify service or milestone requirements, commencement date, cliff, vesting intervals and consequences of good-leaver or bad-leaver events.

Pakistan's corporate and property rules must be considered when implementing these arrangements. The parties cannot assume that a US startup template permitting automatic forfeiture will operate without adaptation. Transfer instruments, consideration, articles and statutory shareholder rights must be reconciled.

Intellectual property must belong where investors expect it

A major investor usually expects the startup to own or lawfully control the software, domain, brand and business systems essential to its operations. If the technical founder personally owns the source code and has granted only a revocable licence, the cap table may not reflect the company's actual commercial value.

Before finalising equity, identify background IP contributed by each founder and whether it is assigned or licensed. The company should obtain signed contributor documents and a clear statement about third-party code and open-source dependencies. Valuation of technology contributed as equity should be distinguished from an ordinary cash subscription.

Allocate board and management roles separately

Share ownership does not automatically make either founder chief executive, sole banking signatory or director for life. The company's articles and appropriate resolutions should regulate appointments, executive authority, remuneration and removal procedures. A sixty-percent shareholder may still be bound by valid veto rights or director-appointment arrangements.

The shareholders' agreement should identify who controls budgets, hiring, borrowing, material contracts, additional shares and sale of the business. Clear delegations prevent routine operational decisions from requiring unanimous founder approval while preserving protection for genuinely fundamental matters.

Consider dilution from future fundraising

Founders should model the effect of seed rounds, convertible instruments and employee equity on their eventual percentages. A split that appears fair at incorporation may look very different after two external investments and a substantial option pool. Economic ownership, voting rights and liquidation preferences can also diverge.

Prepare a fully diluted cap table and explain each class or contractual right. Investor preference rights may alter proceeds on an exit even where an investor owns a smaller percentage of ordinary shares. Founders should negotiate those rights consciously rather than focus exclusively on headline valuation.

Founder loans, expenses and remuneration

One founder may finance initial expenses while the other works without salary. The parties should decide whether the cash is equity, repayable debt or reimbursement, and how unpaid work is reflected in vesting or future compensation. A loose promise that 'we will adjust it later' can become an accounting and legal dispute.

Reimbursements should be supported by invoices and properly approved. Founder salaries should be documented and aligned with company resources. If the business cannot afford wages, the agreement should address whether any unpaid amount accrues as a debt or is merely the founder's commercial risk.

What happens if one founder stops working?

The agreement should define voluntary departure, dismissal for cause, disability, death, prolonged inactivity and failure to meet milestones. It should also explain whether voting or board rights change independently of share ownership. Removing a co-founder as employee or director does not automatically cancel registered shares.

A good-leaver mechanism may recognise already earned equity, while a bad-leaver mechanism may deal with serious misconduct subject to enforceable drafting. Unbounded discretion for one founder to decide that the other has performed badly can invite conflict. Objective criteria and fair procedures improve enforceability.

Confidentiality, non-solicitation and competition

Founders commonly hold the startup's most valuable customer and technical information. The documents should protect confidential information, company assets and duties while respecting applicable restraints-of-trade principles. A sweeping perpetual non-compete copied from another jurisdiction may be vulnerable and should not substitute for narrow, enforceable protection.

Data access and repository credentials should be controlled by the company, not only one founder's personal accounts. The exit procedure should cover customer lists, passwords, development materials and company records. These are operational controls as well as legal safeguards.

Practical example: funding and technical labour

Suppose one founder invests Rs. 5 million and provides customer access, while another builds the software full-time and plans to operate as CTO. They agree on equal shares but no vesting or IP assignment. Six months later the technical founder leaves and retains control of the source repository, while still owning half the company. The commercial problem is not cured merely by claiming that the initial split was unfair.

A better arrangement would have determined ownership of software, founder commitment, departure mechanics, financing treatment and board responsibilities before incorporation. The precise allocation may still be fifty-fifty, but its supporting contractual architecture makes it much more durable.

Opinion and recommended course

There is no statutory equity ratio appropriate to every pair of founders. The parties should value actual contributions, test future commitments and document their allocation through valid share issuance, a cap table, articles and a shareholders' agreement. They should treat vesting, IP ownership, governance and dilution as part of the equity decision rather than afterthoughts.

Before taking investment, reconcile the legal share register with the founders' understanding and make sure all necessary corporate approvals are complete. A sustainable division is one that both founders understand, that accommodates later capital and that can survive a departure or serious disagreement without paralysing the company.

Principal authorities for verification: Companies Act, 2017, particularly share allotment and transfer provisions; Companies Regulations, 2024; Contract Act, 1872; applicable intellectual-property statutes; articles, shareholders' agreements and documented subscription arrangements.