October 23, 2026
Make someone a co-founder only if the company wouldn't exist without them and they're committing full time; they get meaningful restricted stock with 4-year vesting and an 83(b). Make them an advisor if they'll give you a few hours a month of expertise or introductions, for 0.25% to 1% of the fully diluted shares. Make them an employee if they'll work under your direction on an ongoing basis, which means a salary that meets wage laws, ISOs and a CIIAA. Make them a contractor only if they'll deliver defined work on their own terms and invoice for it. The label has to match how the person actually works, because wage and classification laws look at the substance, not the title.
Key takeaways
| Co-founder | Advisor | Employee | Contractor | |
|---|---|---|---|---|
| Control | Shares control as officer, director or both | None; gives advice | Works under your direction | Controls how, when and where the work is done |
| Pay | Often zero salary at first, set in writing | Usually equity only | Salary or hourly wage that meets wage laws | Invoices for fees |
| Equity type | Restricted stock (RSAs) at par | Restricted stock early, NSOs later | RSAs before the first 409A, then ISOs | NSOs, if any |
| Typical amount | Meaningful, set by negotiation | 0.25% to 1% fully diluted | Set by role and stage | Small, if any |
| Vesting | 4 years, 1-year cliff | 1 to 2 years monthly, often no cliff | 4 years, 1-year cliff | Tied to the engagement |
| IP | RSPA and CIIAA | Advisor agreement with IP assignment | CIIAA | Contractor agreement with IP assignment |
| Legal exposure | Fiduciary duties; founder disputes | Low | Wage, leave, discrimination and benefits laws | Misclassification |
| Paperwork | RSPA, CIIAA, 83(b), board consent | Advisor agreement, board consent | Offer letter, CIIAA, I-9, W-4, grant | Contractor agreement, W-9, 1099 |
A co-founder is someone the company depends on for its existence: they're building the product, running the business or bringing something no one else can. They should be full time or committed to a near-term full-time start date, and they usually serve as an officer, a director or both.
Co-founders receive restricted stock (RSAs) at par value, typically $0.00001 per share, under a restricted stock purchase agreement (RSPA). The stock vests over 4 years with a 1-year cliff, and if a co-founder leaves early, the company can buy back the unvested shares at the price paid. Each co-founder should file an 83(b) election with the IRS within 30 days of the date the shares are issued, and sign a CIIAA assigning their inventions to the company. See Founder Equity: How To Split Equity Among Co-founders and How Do I Pick a Co-founder? If the company already exists, see How Do I Add a Co-founder After Incorporating?
An advisor brings expertise, credibility or introductions for a few hours a month. They don't manage anyone, don't have authority to bind the company and don't control how it's run. Typical equity is 0.25% to 1% of the fully diluted shares, depending on how much time and value they'll contribute. Early on, before the company has a 409A valuation, issue restricted stock at par; once options are the norm, grant NSOs. Monthly vesting over 1 to 2 years without a cliff is common, because advisors deliver value early and the relationship can be ended at any time.
The advisor agreement sets out the expected time commitment, the equity, confidentiality and an assignment of any IP the advisor develops for the company. See Startup Advisor Agreement and What's a Typical Advisor Equity Award?
Hire an employee when the person will do ongoing work under your direction: you set priorities, hours and methods, and the role has no end date. Employees must be paid at least minimum wage, and an employee classified as exempt from overtime must receive at least the federal salary threshold, currently $684 a week, or the higher threshold in states such as California, New York, Colorado and Washington.
US employees receive incentive stock options (ISOs) once the company has a 409A valuation, or restricted stock before it. They sign an at-will offer letter, with no probation period, and a CIIAA, and they complete an I-9 and a W-4. Benefits, payroll taxes, workers' compensation and state employment law all follow. See Startup Employee Equity.
A contractor delivers defined work and runs their own business. They set their hours, use their own tools, can work for others and invoice for deliverables or time. A design sprint, a security audit or a fixed-scope build are classic contractor engagements.
The contractor agreement must assign all work product to the company in present-tense language; without it, the contractor generally owns what they create. If you grant equity, it's NSOs, because ISOs are only for employees. The risk is misclassification: if you direct a contractor's daily work, set their hours and keep them on indefinitely, federal and state tests may treat them as an employee, with back taxes and wage claims to follow. See Should My Startup Hire Someone as an Employee or a Contractor? and How Do I Convert a Contractor to an Employee?
The equity-only employee. Founders often want to bring on someone who'll work full time for equity and no salary. If that person works under your direction, they're an employee, and wage law requires at least minimum wage in cash; equity doesn't count. Calling them a contractor or an advisor doesn't change the analysis. Founders who own a significant stake and run the company are treated differently, and the clean approach for them is to set salary to zero in writing rather than accrue deferred salary. See Workers at My Startup Are Willing to Work for Equity Only. Is That OK?
The part-time co-founder. Someone who keeps their day job and contributes nights and weekends is a real risk as a co-founder. Their employer's invention assignment agreement may claim what they build, they can't move at the pace you need, and a large equity grant is hard to justify if they never go full time. Either make them an advisor until they join, or issue co-founder stock with vesting and a written expectation of a full-time start date. See Can I Start a Startup While I Still Have a Day Job?
Promising equity without issuing it. A handshake promise of "5%" to anyone, in any of these roles, creates disputes. Put every grant through a board consent and a signed agreement, stated as a number of shares. See Promising vs Issuing Equity.
See Should I Give a Venture Studio a Large Stake in My Startup?
Ask three questions. First, is this person essential to the company's existence? If the company would fold without them and they're all in, they're a co-founder. Second, will they work under your direction? If you'll set their priorities and hours on an ongoing basis, they're an employee. If they'll deliver defined work their own way, they're a contractor. If they'll give advice and introductions a few hours a month, they're an advisor. Third, how will they be paid? Employees need wages. Contractors need fees. Advisors and co-founders can start on equity alone, but co-founders who work for the company should have salary set to zero in writing until the company can pay.
Example. A two-founder company has 10,000,000 fully diluted shares: 9,000,000 founder shares and a 1,000,000-share option pool. The founders are deciding how to bring on a senior engineer.
As a co-founder, she buys 1,000,000 new shares at $0.00001 per share, paying $10. Fully diluted shares rise to 11,000,000, so she owns about 9.09%. Her first 250,000 shares vest at one year and the rest monthly over the next 36 months, and she files an 83(b) within 30 days.
As an employee after the company's first 409A, she receives a $140,000 salary and an ISO grant of 100,000 shares from the pool, 1.00% of the 10,000,000 fully diluted shares, since the pool is already counted.
As an advisor, she receives 60,000 shares of restricted stock under the plan, 0.60%, vesting 2,500 shares a month over 24 months with no cliff, and no salary.
For more, see How Do I Pick a Co-founder?, What's a Typical Advisor Equity Award?, Should My Startup Hire Someone as an Employee or a Contractor? and Startup Employee Equity.
If you're not sure how to bring someone on, contact us before you promise them anything.
