The 5 Equity Mistakes That Scare Off Investors

A few years ago, I watched a founder give 20% equity to a "tech co-founder" who delivered nothing but excuses.

Big on vision, but somehow never got around to actually build anything (in 9 months!)

By the time they realized it, the guy had gone full ghost mode.

So the original CEO founder finds someone new, gets the product built, and goes out to raise…

But Mr. Absentee Tech Cofounder’s equity had already vested.

Investors saw him as dead weight on the cap table.

Without a deal in sight, the company died six months later.

Unfortunately, this isn’t rare.

Founders get trigger-happy with equity and end up married to the wrong people for life.

Want to raise capital later? That messy cap table you created in Year One might be the reason you can’t.

Here’s the truth: Equity isn't free. It just feels like it in the moment.

So how do you reward the right people without wrecking your future?

Why Most Founders Get This Wrong

• They think equity = loyalty. It doesn’t.
• They offer equity before people prove themselves.
• They use outdated advice like "split it evenly among co-founders."
• They ignore vesting terms, cliffs, and performance-based milestones.
• They don't realize equity given is equity gone — forever.

Bonus: “You’re gonna get 10% of the company!….” but Founder has 0 concept of how much value or dollars they’re giving away.

Don’t stress. There’s a smarter way to do this.

You can bring in great people early.

You can incentivize them.

You can raise capital later without a Frankenstein cap table.

Here’s how:

Step 1: Don’t hand out equity. Make them earn it.

Someone asking for equity on Day 1 before doing anything?

Probably a red flag.

Instead: use vesting schedules with 1-year cliffs. This gives you a trial period.

Even better? Tie equity to performance milestones.

• To a Head of Sales: "You get X% when we hit $100k MRR."
• To a CTO candidate: "You unlock Y% once the MVP is launched."

This way, you’re not just handing out slices of the pie. You're trading performance for ownership.

Tip: Avoid single-trigger vesting. It makes things messy when someone leaves.

Step 2: Use advisory shares the right way

Got someone great who's giving advice or connections but not day-to-day?

Don’t toss them co-founder equity.

Use an advisor agreement.

• 0.1% to 1% equity.
• Vesting over 1-2 years.
• Clear scope of involvement.

This keeps them incentivized, without bloating your cap table.

What not to do: Give your rich uncle 5% because he "helped you get started."

(That’s not help. That’s charity.)

Step 3: Put protection clauses in place (and actually use them)

Even with vesting, people get clever.

That’s why Founder Agreements and Buyback Clauses matter.

If someone leaves or ghosts, you should have the right to:

• Reclaim unvested shares.
• Buy back vested shares at a fixed or fair market value.

Bonus points: Include a "Bad Leaver Clause" for team members who quit at the worst time or create drama.

This protects you from dead equity — shares owned by people who no longer contribute but still have voting rights.

Don’t skip this. Ever.

Final Takeaway:

You can fix a product. You can change a market. But you can’t unwind a messy cap table.

Be generous, but not stupid.

When you’re designing comp packages, think in dollar terms first, and translate that to shares (and percentage ownership) only as a second step.

Reward belief with upside — not blank checks.

The smartest founders treat equity like cash: limited, valuable, and strategic.

Now you can too.

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