The way it's usually done (in Silicon Valley) at least, is that all co-founders are shareholders of a C corporation. They buy their shares at a very low price, and the corporation has buy-back rights to those shares in case the co-founder leaves before 4 years.

Note: it's slightly different from regular employees who have stock options. The main differences are: employees don't own stock upfront, plus there usually is a 1-year cliff for vesting, so if the employee leaves before a year, they have nothing.

Thanks very much for the advice

If you want to incorporate, I would get a startup-savvy lawyer in your area and just use their boilerplate restricted stock and IP agreements for you and your co-founders.

If you aren't ready to incorporate, then just write the terms everyone has agreed to in plain, unambiguous English, and have everyone sign it and give everyone a copy. Note the equity splits, the agreed-upon vesting schedule (standard seems to be 4 year vesting, first 25% after 1 year, then monthly after that, with double-trigger acceleration upon acquisition), what everyone is agreeing to for the IP, and any other rules you might be coming up with for the business.

This just keeps everyone on the same page right from the get-go, and prevents revisionist history later. However, once you get serious, I would go ahead and incorporate.

I think that's good advice. Either get a lawyer involved or avoid incorporation and complex legal documents entirely.

One thing that you absolutely do not want to mess up is the IRS' 83(b) election rule: http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83...

Thanks for pointing me to this

Thank you very much for the help

Your lawyer.

It's not a DIY project.

Even when it is just small business.