Written by Kyle Flewelling, JD Candidate 2027
Note: The information below is for general information only and does not constitute legal advice. Its application will depend on the circumstances of each situation.
Introduction
An important question for entrepreneurs in start-up businesses is how to allocate founder equity. Typically, this question arises once the venture has become more sophisticated and profitability is imminent. How to allocate founder equity is ultimately a business decision. From a solicitor’s perspective, what is most important is that founders put in writing any informal or ad hoc agreements regarding equity distribution early on in the life of their venture.
It is, however, typical that significant time will pass before founders think about the formal allocation of equity. As Professor Tingle put it, early on in a venture when capital is hard to come by, entrepreneurs are often loath to do “something as frivolous as pay a lawyer”. The problem with this is that significant risk results from the ambiguity that is inherent in the lack of a formal arrangement.[[1]]
A recent case out of Ontario has confirmed the risks of leaving a founder equity arrangement informal and offers a cautionary tale for founders who would prefer to play things fast and loose with their equity arrangements. This case highlights that it is in the best interests of the corporation and the founders to have a clear and comprehensive founders’ equity agreement.
Case Summary: Tayts v Fox, 2026 ONSC 226
In January 2026, the Ontario Superior Court decided Tayts v Fox, 2026 ONSC 226. The plaintiff (Tayts) contributed substantial work to a medical-cannabis startup in reliance on a reasonable expectation that he would receive founders’ shares. The other founders consistently treated Tayts as a co-founder. However, Tayts’ share entitlement was never put in a formal agreement.
A key concern was that Tayts had a prior criminal conviction, which he feared might negatively impact the venture if his name were associated with it. Tayts also did not have funds to invest in the venture. For this reason, it was decided that Tayts would instead earn an interest through his work or “sweat equity,” and that another founder (Zavet), with whom Tayts dealt closely throughout the venture, would hold the shares attributable to Tayts.[[2]]
The relationship broke down between Tayts and the other founders when Tayts was excluded from the founders’ share-allocation discussions. Zavet later offered Tayts 7,000 founder shares, approximately 2.46% of Zavet’s allocation, far below the range the Court ultimately found Tayts could reasonably expect. When Zavet raised concerns about a possible dispute with Tayts, another founder responded: “Unless you agreed to something in writing there is nothing to be concerned about.”[[3]]
Tayts commenced litigation, alleging that he joined the venture as a co-founder and was entitled to 25% of Zavet’s founder shares. He claimed that Zavet breached that agreement and acted oppressively by excluding him from the share-allocation deliberations. The other founders denied that any final percentage had been agreed on and maintained that Tayts had no enforceable contractual entitlement to the shares he claimed.
The Court found no enforceable contract because the percentage of shares was an essential term and the parties had never agreed on a final figure. It nevertheless found that Tayts reasonably expected to receive between 15% and 25% of Zavet’s founder shares.[[4]] The Court then looked at the whole factual matrix in order to determine whether oppressive conduct had occurred. Some relevant factors were that Tayts helped prepare an early project plan, recruited experienced growers, provided industry knowledge, assisted with regulatory work, drafted investor materials, and contributed approximately 3,500 hours to the venture.[[5]] The Court found that excluding Tayts from the allocation process unfairly disregarded his interests. Using 15%, the bottom of the range, it entered judgment against Zavet for $1,313,495.13.
There is an important lesson to be drawn from this case. Without a written agreement, a court may have to reconstruct the parties’ reasonable expectations and fashion a remedy. This is uncertain and is only possible as a result of expensive and drawn-out litigation.[[6]] The Court will be free to fashion remedies based on reasonable expectations of the parties, which it will determine by engaging in a detailed analysis of the entire factual matrix. This outcome can be safely avoided by taking adequate steps at the outset of a venture to draft a formal founders’ equity agreement.
Key Considerations for Founder Equity
A founders’ equity agreement should generally address the following.
1. Share Allocation
The agreement should state the exact number or percentage of shares each founder will receive and clarify whether that percentage refers to the entire company, a particular share class, or another founder's allocation. If ownership depends on future contributions, the agreement should provide an objective formula or explain how and when the entitlement will be determined.[[7]]
2. Founders’ Individual Contributions
The agreement should describe what each founder must contribute and when the related shares will be issued or earned. Further, it should state whether shares are earned immediately, over time, or upon specified milestones. The founders should also complete the necessary corporate steps and ensure that the capitalization table, share register, and board resolutions reflect the same arrangement.[[8]]
3. Plans for Vesting and Departure
Where a founder's contribution will occur over time, vesting, escrow, or repurchase provisions can address the risk of an early departure. The agreement should state what happens on resignation, termination, death, or disability, and include how unvested shares may be repurchased and at what price.[[9]]
4. Future Financings, Dilution, and Changes
The agreement should identify who may approve or change a founder’s allocation and how future financing, dilution, and transfers will affect the founders' interests. If the venture changes structure or moves into a new entity, the founders should confirm in writing whether the original arrangement continues.
Takeaways
Tayts demonstrates that leaving an equity arrangement unresolved creates risk for everyone involved. The founder expecting shares may be unable to prove his interest in court, while the company and the other founders may still face claims based on reasonable expectations, oppression, or unjust enrichment. Failing to document the arrangement replaces the certainty of written terms with costly and uncertain litigation. The best practice is to avoid this by implementing a formal agreement.
Endnotes
[1] Bryce C Tingle KC, Start-Up and Growth Companies in Canada: A Guide to Legal and Business Practice, 4th ed (Toronto: LexisNexis Canada, 2026) at 156 [Tingle].
[2] Tayts v Fox, 2026 ONSC 226 at paras 57–59, 70, 76, 103–133 [Tayts].
[3] Ibid at paras 226–250, especially para 250.
[4] Ibid at paras 212–223.
[5] Ibid at paras 167–208, 253–265, 274–296, 353.
[6] Tayts, supra note 2 at paras 214–223, 253–265, 298–309.
[7] Tingle, supra note 1 at 153–158; Tayts, supra note 2 at paras 134–165, 214–215.
[8] Tingle, supra note 1 at 156–158.
[9] Tingle, supra note 1 at 173–175.
