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Can we change how the equity is split between co-founders?

EquityGovernanceTax

Yes, and how much work it is depends on whether the shares have been issued. Before issuance, the split is a number in a draft restricted stock agreement and a draft board consent, and changing it is changing the number. After issuance the shares belong to people, and moving them takes one of three transactions: the company buys back shares from one founder and issues them to another, the company issues new shares to the founder who is getting more, or one founder transfers shares directly to another. Each needs a board consent, new or amended agreements, an updated stock ledger, and compliance with the transfer restrictions every founder signed.

The tax consequence of each route

A repurchase of unvested shares at the price the founder paid is the cleanest, because the company is exercising a right it already holds, and the shares return to the company at cost. A new issuance to a founder at par, when the company is now worth more than par, is compensation income to that founder on the difference, and starts a fresh 30-day 83(b) window. A transfer from one founder to another for less than the shares are worth may be treated as a gift or as compensation, depending on why it happened. None of these is a reason not to fix a split that is wrong. They are the reason to fix it early, while the shares are still worth what was paid for them.

Do not do it informally

A handshake, a message thread, or a spreadsheet does not change who owns the company. The stock ledger and the signed agreements do, and an investor's counsel will read those and ignore the rest. Founders who agree on a new split and never paper it have created a dispute for later, when the shares are worth arguing over.

One more thing that gets missed: if the split changes because a founder is leaving, the departure and the repurchase belong in the same set of documents, along with confirmation that the departing founder's invention assignment stands.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.