Vesting: Just Do It

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VestingI would advise the founders of any startup to ensure that all founders’ equity is subject to vesting. Failure to do so can cause massive problems.

Rather than reinvent the wheel, I’ve put together some key quotes from – and links to - relevant articles by people who are far more knowledgable and qualified about the topic than I.

Orrick’s Start-Up Forms Library includes a Common Stock Purchase Agreement (with Vesting) that, although written with US and Californian law in mind, gives the general gist of what a vesting agreement looks like. The Seedhack Founders Collaboration Agreement also incorporates vesting provisions.

I wouldn’t necessarily say that a vesting agreement needs to be in place from Day One but, at the very least, co-founders should  familiarise themselves with, and ensure that they understand vesting as a concept and collectively agree that their stakes in the startup will be subject to vesting.


 

Vesting of founders’ shares often makes co-founders uncomfortable. However, the consequences of failing to address this issue can be catastrophic to a company.

– Founder (Reverse) Vesting: An Equitable Solution by Michael G Salmon of SalmonLaw


 

[Vesting] is important because it prevents a co-founder from leaving after only a few months, and yet retaining a huge part of the company. The last thing you (or an investor) will want is for someone to hold a lot of equity and no longer be contributing to your success.

Under a typical vesting schedule for employees, shares vest over a four-year period, with 25% vesting at the end of the first year (called a “one-year cliff”), which ensures employees stay around for a year before owning any of the company. The remaining shares vest thereafter on a monthly or quarterly basis.

What Every Founder Needs to Know About Equity (Forbes article)


 

Go to the founder of a startup, and tell them you want them to give back their stock. Tell them it’s in their best interest. Tell them they can earn it back, if they stick around for a while. Sound crazy? It probably will to them. Yet bizarrely enough, it’s the right thing to do.

This is founder vesting, and companies are regularly destroyed by ignoring it.

The founders get their stock at the beginning in a big whack, but the company has the right to take it back for a negligible amount of money (the “repurchase agreement”). And as time goes on, that right erodes, so the net is the same.

Founders Should Give Their Stock Back: Why Vesting is in Your Startup’s Best Interest
by Dan Shapiro for PandoDaily


 

All startup employees – including founders! – should vest over 4 years from their start date (with a one year “cliff”). When I used to work in VC I can’t tell you how many companies I saw where some random former founder who was long gone from the company and was only there for some short period of time owned some big chunk of the company. Not only is this just plain unfair, it also means there is a lot less room for giving equity to employees and for raising new capital. Even if you are founding a company with your best friend – actually, especially if you are founding a company with your best friend – everyone should have vesting. If you have a lawyer who tells you otherwise, get a new lawyer.

Founder vesting by Chris Dixon


 

Written by jackgavigan

April 23, 2014 at 8:44 pm

Posted in Entrepreneurship

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