[Direct answer]Core recommendations for equity distribution in startups: Avoid equal distribution and let core founders hold significantly more shares. Maintain three control lines—67% (two-thirds line for special resolutions such as amending the articles of association and increasing or decreasing capital), 51% (majority line for ordinary resolutions), and 34% (veto line for special resolutions). According to Article 65 of the Company Law of the People's Republic of China, shareholders exercise voting rights in proportion to their contributions. The articles of association may stipulate otherwise, with proportion reflecting voting power. In addition to proportion, it is essential to sign a shareholders' agreement specifying contributions, division of labor, maturity period of equity, and exit repurchase clauses. If cooperation collapses and the contractual purpose is thwarted, the agreement may be terminated and investments refunded in accordance with Article 563 of the Civil Code of the People's Republic of China. It is recommended to have a lawyer design the structure and sign the agreement in writing before registration. For more details, please refer to the following link:Business Services｜Contract Dispute Resolution ServicesAndBeijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 65 of the Company Law of the People's Republic of China (effective July 1, 2024)

The shareholders' meeting shall be held by the shareholders exercising their voting rights in proportion to their capital contributions, unless otherwise provided for in the company's articles of association. This article establishes the basic rule of "proportion equals voting rights", and it is also the calculation basis for the three control lines of 67%, 51%, and 34%. Article 66 stipulates that special resolutions such as amending the articles of association, increasing or decreasing the registered capital, merging, splitting, or dissolving the company must be passed by shareholders representing more than two-thirds of the voting rights, while ordinary resolutions can be passed by a majority vote. Startup enterprises should design their shareholding structures accordingly to avoid decision-making deadlocks caused by an equal 50-50 split of shares; they can also stipulate different voting rights for the same shares in the articles of association, transferring equity while retaining operational control.

2. Article 563 of the Civil Code of the People's Republic of China (effective January 1, 2021)

In the event of force majeure, the other party explicitly stating or demonstrating through actions that they will not perform their main obligations, delaying the performance of main obligations and still failing to perform them after being urged, delaying the performance of main obligations, or other breaches of contract that result in the failure to achieve the contractual purpose, the parties may terminate the contract. In the context of equity cooperation, if the agreement stipulates the joint establishment of a new company but the new company has never been established, and the investment purpose has failed, the investor may terminate the shareholders' agreement and request the return of the investment according to this provision. To meet the constitutive requirements, it is necessary to prove that the agreement is valid, that the investor has fulfilled their obligation to invest, and that the other party's actions have resulted in the failure to achieve the contractual purpose. The transfer vouchers and the chain of agreements are key evidence.

3. Practical adjudication guidelines

The common approach of courts in handling disputes over equity ratios and capital contributions is as follows: First, respect the principle of autonomy of will. Special arrangements in the articles of association and shareholder agreements regarding voting rights and dividends are generally valid. Second, strictly determine the nature of capital contributions. Transfers without records of the intention to invest are easily regarded as loan transactions, so it is necessary to retain investment agreements and documents confirming creditor-debtor relationships. Third, if a sole proprietorship or sole shareholder is sued, those who cannot prove that the company's assets are independent of their personal assets shall bear joint and several liability for the company's debts. The most common pitfalls include failing to sign a written agreement for holding shares on behalf of others, lacking exit mechanisms, and disputes arising after each party sticks to their own claims and encounters difficulties in providing evidence.

II. Henglue Lawyer's Real Cases (Detailed Review)

Review of the case:On March 8, 2017, Zhao * signed a "Subsidiary Investment Partnership Agreement" with B (Beijing) Education Technology Co., Ltd., agreeing to jointly open an offline flagship campus. Zhao * invested 320,000 yuan (including a registered capital of 8,000 yuan and a capital reserve of 312,000 yuan) into B Company's special account. Subsequently, Mu * invested 500,000 yuan and Li * invested 100,000 yuan for the campus's renovation and operation, but the parties never established a new company. On November 14, 2017, B Company signed an "Agreement" with Zhao *, A Company, Mu *, and Li *, agreeing to change the brand, B Company's withdrawal, and A Company's acquisition of rights and interests. On the same day, Zhao * signed a "Shareholders' Agreement" with A Company, Mu *, and Li *, agreeing that the equity ratio of the proposed new company would be 77% for A Company, 12.5% for Mu *, 8% for Zhao *, and 2.5% for Li *, with A Company responsible for registration and operation. However, despite the campus's continued operation, the new company has never been established, and Zhao *'s contractual objectives have failed to be achieved. Therefore, Zhao * entrusted lawyers Xue Shuhua and Wang Dong from Beijing Henglue Law Firm to file a lawsuit, requesting the termination of the "Shareholders' Agreement" and the return of the invested 320,000 yuan.

The focus of the controversy:First, the new company has never been established, so can the Shareholders' Agreement be terminated if Zhao's contractual purpose cannot be achieved? Second, has Zhao fulfilled his obligation to make contributions, and should the contributions be returned? Third, as a one-person company wholly owned by A Company, should B Company bear joint and several liability for the return of the contributions?

Our position and the position of the other party are as follows:Zhao *fang claimed that the agreements were true expressions of intention and legally valid, and that the obligation to invest had been fulfilled. A Company had failed to establish a new company, which constituted a fundamental breach of contract. Therefore, the agreements should be rescinded and 320,000 yuan should be returned. A and B Companies agreed to rescind the agreements, but denied receiving the investment under the agreements and argued that B Company was not a party to the agreements and therefore did not agree to return the funds.

Attorney's Strategy and Legal Opinions:The two lawyers argued: Firstly, the "Shareholders' Agreement" is legally valid and should be fully implemented. Based on the provisions of the agreement and the details of the creditor-debtor relationship in another case, Zhao * and others have fulfilled their obligation to contribute capital; Secondly, after signing the agreement, none of the parties established a new company, Zhao * did not participate in the operation, and the contractual rights were never realized. A Company constituted a fundamental breach of contract, and Zhao * exercised his right of rescission in accordance with Article 563 of the Civil Code, which is legally justified; Thirdly, B Company is a one-person limited liability company of A Company's sole shareholder. If it cannot prove that the company's assets are independent of the shareholders' assets, it shall bear joint and several liability for the return of the capital contributed.

The court's reasoning and the outcome of the case:The court adopted the lawyer's main arguments, confirming that the "Shareholders' Agreement" signed by Zhao * and A Company, Mu * and Li * on November 14, 2017 was terminated on August 15, 2023. The court ruled that A Company should return the investment amount of 320,000 yuan to Zhao * within ten days. The investors' funds invested due to the failure of the contractual purpose were successfully recovered through the termination of the agreement, and also provided a reference for the equity arrangement and investment traceability of the start-up team.

This case is handled by Beijing Henglu Law Firm.Xue Suhua、Wang DongThe attorney (practice license number: 11101201910090334, 11101201910090334, subject to the document issued by the judicial administrative organ) acts as the agent.

III. Frequently Asked Questions

Q1: What are the risks of assigning equal shares to all members of a startup team?

A fifty-fifty split or a one-third share for each of the three founders may seem fair, but it is actually a hidden trap. Without a controlling shareholder, major decisions require unanimous approval, and once there are disagreements, the company may face a deadlock, which could even lead to its dissolution and liquidation. Investors will also question the governance structure when financing the company. A more prudent approach is to establish a core founder with a significantly larger shareholding, and distribute the remaining shares based on investment amounts, division of labor, and contribution levels. Moreover, it is necessary to clearly stipulate the voting mechanism and deadlock resolution clauses in the company's bylaws and shareholders' agreements to avoid a situation where "everyone has a say but no one makes the final decision".

Q2: What do the three lines of 67%, 51%, and 34% respectively mean?

According to Article 66 of the Company Law, special resolutions such as amending the articles of association, increasing or decreasing the registered capital, merging, splitting, or dissolving the company must be approved by shareholders representing more than two-thirds of the voting rights. With a 67% stake, one can completely control major matters; with a 51% stake, one can dominate daily operational decisions; and with a stake of more than 34%, one has the right to veto special resolutions. Startups should plan the proportion of each round based on the dilution space reserved for future financing, rather than making random equal allocations at the time of signing the contract.

Q3: What provisions should at least be included in a shareholders' agreement?

The proposal covers six items: investment methods, amounts, and terms; division of labor and non-competition clauses among all parties; equity maturity periods and buyback arrangements to prevent "leaving the company but keeping the shares"; decision-making matters and voting arrangements; dividend and capital increase rules; exit mechanisms and deadlock resolution, such as valuation and buyback. The more specific the terms are, the less room there will be for disputes in the future. After signing the agreement, it should be checked in conjunction with the company's articles of association to avoid conflicts between the agreement and the articles of association. A supporting document should be issued by a lawyer.

Q4: The company has not been established even though I've invested money in it. Can I get my investment back?

Yes. If the agreement stipulates that the parties will jointly establish a company, but the company is never registered and the investment purpose is not achieved, the parties may, in accordance with Article 563 of the Civil Code, claim to rescind the agreement and return the investment. Key evidence includes the investment agreement, transfer receipts, reminder records, and the fact that the other party failed to fulfill its obligations. In the case mentioned above, after Zhao * invested 320,000 yuan, the new company was not established for many years. The court confirmed the rescission of the Shareholders' Agreement and ordered Company A to return all the investment funds within ten days.

Q5: What risks does equity trusteeship pose for start-up companies?

In a nominee holding relationship, the actual investors completely rely on the integrity of the nominal shareholders, and there are risks such as the nominal shareholders disposing of the equity without authorization, the equity being frozen by their creditors, and disputes over the validity of the nominee holding agreement. In addition, the actual investors need to obtain the consent of more than half of the other shareholders before they can become publicly registered shareholders. Startup companies should hold shares directly as much as possible. If nominee holding is necessary, they must sign a written nominee holding agreement, keep the investment certificates, and set up protective measures such as equity pledges or voting rights delegations. Lawyers should review all documents throughout the process.

IV. Suggestions for Protecting Rights

  • Define the structure before registration: The core founders hold the majority of shares, and the shares are distributed based on contributions with an option pool reserved. This helps avoid adjustments after an equal shareholding stalemate.
  • The shareholders' agreement and the articles of association are signed simultaneously: they specify the investment, the maturity period, the exit buyback and the provisions for resolving deadlocks. The conflicts between the two documents will be verified by a lawyer.
  • It is essential to keep records of investments: specify the purpose of the transfer in the transfer instructions, and retain agreements, receipts, and documents confirming creditor-debtor relationships to form a complete chain of evidence for the investment.
  • Early assessment of cooperation breakdown: If the other party refuses to fulfill its obligations and the purpose of the cooperation is thwarted, promptly entrust a lawyer to assert the termination of the agreement and the return of the investment to prevent delays and expand losses. For reference, please refer to corporate governance complianceIntellectual Property Protection | Corporate Legal Services.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with evidence materials, to avoid missing the statutory time limit. →Business and commercial legal services·Attorney Xue Suhua·Beijing Henglue Law Firm