Splitting Equity Between Co-Founders: The Legal Mechanics

Every equity split gets negotiated twice. The first negotiation happens over coffee, ends in a handshake, and takes an evening. The second happens when an investor's counsel asks a simple question — "what did each founder actually give for these shares, and where is the paper?" — and takes weeks, because the answer was never written down. This briefing is about avoiding the second negotiation. It does not tell you what percentages are fair; that is a commercial judgment. It tells you how Pakistani law converts each type of founder contribution into shares, as the law stands in July 2026, and where the conversions go wrong.

Shares are issued for something

Start from a principle founders routinely skip past: under the Companies Act, 2017, shares are not declarations of status. They are issued for consideration — money paid, or value delivered — and the company's filings with the SECP record what that consideration was. When shares are allotted for consideration other than cash, the return the company files must disclose it, and the underlying contract should exist in writing [DISCLOSURE REQUIREMENTS FOR NON-CASH ALLOTMENTS UNDER THE COMPANIES ACT 2017 — TO BE VERIFIED BY REVIEWING LAWYER]. This is where the trouble begins, because the contributions founders actually make — code written last year, savings advanced this year, full-time work promised for the next four — map onto the Act's machinery in very different ways, and pretending they are all the same thing ("we each got shares") leaves a record that cannot survive diligence.

There is a second principle worth stating plainly: Pakistani law has no general sweat-equity route. The Companies Act, 2017 does not provide a mechanism for allotting shares against future services as such, and an allotment recorded as paid-up against work not yet performed is an invitation to challenge [PERMISSIBILITY OF ALLOTMENTS FOR FUTURE SERVICES — TO BE VERIFIED BY REVIEWING LAWYER]. Future work is handled by a different tool — full allotment now, disciplined by reverse vesting in contract — which is a structure, not a statutory shortcut.

Matching the contribution to the mechanism

The table below is the decision framework we use in practice. Find each founder's actual contribution in the left column and follow the row.

Contribution	Structuring route	Paper required	Watch for
Cash at incorporation	Subscribe for shares in the memorandum; pay in the subscription money	Memorandum and articles; bank evidence of payment	Cash that never actually moved — paid-up capital should be traceable
Cash after incorporation	Further issue under section 83 of the Companies Act, 2017, or a shareholder loan or convertible instrument	Members' authority for the issue; loan or note agreement, stamped	Informal top-ups booked as "director's loan" with no terms, no interest treatment, no repayment ranking
Pre-incorporation IP (code, brand, prototype)	Allotment for consideration other than cash, paired with a written IP assignment deed to the company	Assignment deed for stated consideration; valuation record; non-cash allotment filing	The deed is signed after incorporation and actually identifies the assets — the company cannot own what was created before it existed without one
Physical assets or equipment	Allotment for consideration other than cash at a supportable valuation	Sale or transfer instrument; valuation; allotment filing	Overvalued assets inflating one founder's stake — the number will be tested at the first raise
Future full-time work	Full allotment now, subject to reverse vesting as a contractual transfer obligation	Founders' agreement with vesting, leaver definitions, escrowed transfer instruments	A vesting clause built on a company buy-back the Companies Act, 2017 constrains
Part-time or advisory involvement	Small allotment with milestone vesting, or a contractual option to subscribe later	Advisor agreement with deliverables; option terms with expiry	Percentage points granted for "guidance" that stops after month three
Network, reputation, "connections"	Milestone-tied vesting, or revenue-linked compensation instead of equity	Founders' agreement defining the milestones objectively	Contributions that cannot be defined cannot be verified — and undefinable promises risk voidness for uncertainty under section 29 of the Contract Act, 1872
The idea itself	A modest premium inside the split, not a separate instrument	Recital in the founders' agreement recording the reasoning	Idea-holders demanding control without execution; the recital is what prevents re-litigation of the split later

Two rows deserve expansion. The financing founder — the one who keeps the company alive with periodic transfers from savings — is better served by instruments than by an ever-growing shareholding. Each cash injection priced into equity at an arbitrary moment distorts the cap table; a documented shareholder loan, or a convertible note that prices at the next round, keeps the split stable and the record clean. And the technical founder who built the product before the company existed holds personal property: the Copyright Ordinance, 1962 vests copyright in the author, and it reaches the company only by a written assignment signed by the assignor. Shares issued "for the code" without that deed are shares issued for nothing the company received.

The percentages meet company law

Once the split is chosen, check it against the Act's arithmetic, because the Companies Act, 2017 attaches consequences to thresholds that founders cross without noticing. Ordinary resolutions pass by simple majority; special resolutions — needed for amending the articles, changing capital, and the other structural decisions a startup makes constantly — require three-fourths of members voting. A founder above twenty-five per cent can therefore block every special resolution; a founder above seventy-five per cent can pass one alone. A 50/50 split gives each founder a veto over everything and a majority over nothing, which is why it is the split most in need of a written deadlock mechanism ending in a defined buy-sell rather than a mutual promise to talk.

Board control is a separate axis. Shareholding and directorship are distinct legal positions under the Companies Act, 2017, and a founder can dominate one while losing the other. Decide in the founders' agreement how board seats track shareholding, what a departing founder's seat becomes, and which decisions are reserved to the members regardless of board majority.

Writing it down so it holds

The split lives in four documents that must agree with each other. The statutory record: the memorandum, the returns of allotment, and the register of members — what the SECP and any court will treat as the shareholding. The founders' agreement: the split, the reasoning behind it (a recital, because the reasoning is what gets re-argued), vesting, and the leaver machinery. The assignment deeds: for every non-cash contribution, executed for stated consideration as the Contract Act, 1872 requires of any contract. And the articles: amended by special resolution so that transfer restrictions and pre-emption mirror the agreement, then filed. Stamp each private instrument under the applicable provincial stamp law at signing; section 35 of the Stamp Act, 1899 will otherwise hold it out of evidence exactly when you need it. Founders who want a structured way into this paperwork can start with our startup law practice overview and the fuller treatment in our founder agreements guide.

A note on timing, because it is the most common structural regret we see (the pattern below is a composite, details altered). Two founders agree 60/40 over WhatsApp, incorporate months later at 50/50 "for simplicity," and intend to fix it after launch. The fix never happens; the company raises; the round prices the register, not the WhatsApp thread. An oral or informal equity promise can be a valid contract under the Contract Act, 1872, but it is a claim to be litigated, not a shareholding — the register of members is the shareholding. Incorporate at the real split, or paper the adjustment as an actual transfer or issue, immediately.

What this means for you

Before incorporation, list what each founder is genuinely contributing — past work, present cash, future time — and run each item through the table above rather than folding everything into a single percentage conversation. Sign the pre-incorporation IP deeds and the founders' agreement in the same week the company is formed, and amend the articles to match. Test your percentages against the resolution thresholds of the Companies Act, 2017 so no one holds a veto by accident. If the split needs to change later, change it with real instruments, not understandings. The percentages are a negotiation; everything after the percentages is mechanics, and mechanics are cheap only when done at the start.