What's the best way of giving away equity to co-founders e.g. on specific targets met, options, vesting etc?

It shouldn't hurt to follow the same basic model as most companies use -- some amount of options, vested at a specific rate, probably with a one year cliff and then monthly vesting after that.

You have to be a lot more willing to fire, though; you don't want to find yourself owing stock to someone who wasn't productive for a year just because you couldn't think of the right way to fire him/her.

In Nov 2006, Seth Godin addressed the concept behind this issue quite elegantly (I am paraphrasing the relevant points below; the direct link is at the end of this post):

--Don't do a deal where each side gets a fixed percentage. A 50/50 split of a company invented in a bar is always a bad idea. Even paying someone 5% for some sort of contribution can come back to haunt you. INSTEAD, BUILD THE DEAL AROUND A SHIFTING PERCENTAGE BASED ON CONTRIBUTIONS OVER TIME.

--Don't assume that the money you start with is going to be enough. Let's say you and a buddy each put in $5k and each take half the business. Then what? What happens when the money runs out and only one of you is willing to put in the next block of capital?

--Do a deal with someone you trust, but don't do a deal with a friend. You'll likely end up with neither a partner nor a friend in the end.

http://sethgodin.typepad.com/seths_blog/2006/11/dont_make_a_bad.html

Ok so if you're looking to use equity to build your team but already have a product, brand, some traction what's the best way to give away equity to co-founders? Obviously you can't just say here's X% of the stock - what if they leave next week for a new job, dont do any work on the site for the next 6 months? Presumably there are ways of structuring this but what are they and are they expensive in legal terms?

thanks - it seems quite complex - what time period to vest over, how to do the contracts.