Founder Vesting
Founder vesting is when founders agree that their founder’s stock will vest over some period of time, normally four years.
Many times we will come across a company that we might want to invest in and when we look into the cap table and documents, we see that the founders were granted their shares with no vesting. In those situations, we will insist that the founders vest their shares as part of a financing we do, usually Seed but sometimes Series A.
The point of founder vesting is that it is not fair to the rest of the shareholders, particularly the other founders, if one founder leaves early on in the life of a startup. I have seen situations where this has happened and its very problematic. One or more founders continue to work at the company while one or more founders leave but keep all of their founder’s stock. It creates all sorts of problems for the remaining founders and shareholders.
So the answer to this is to put a founder vesting provision into the formation documents when the founders stock is issued. Or if that wasn’t done, to fix it by putting vesting onto the founders shares when a seed or some other financing round is done.
It is typical that all founders will have accelerated vesting of their founders shares in the event of a sale of the company. If the buyer wants them to stay past the sale transaction, they can address the founders equity in the sale transaction in various ways.
It is also typical, but not often agreed upon up front, that a founder who is asked to leave, would get some additional vesting on their founders stock as part of a separation agreement. Full vesting is rare unless the founder is leaving late in their vesting term. But some additional vesting is pretty common in a forced departure.
If you and your co-founders do not have vesting on your founders stock, you should fix that. If you do a financing with a sophisticated angel investor or venture capital firm, you will be required to fix it as part of the investment deal.
Comments (Archived):
This is one where a VC and founders are completely aligned. Totally right. Regardless of financing.I will point out one exception. Past service.If you are doing a late first round. I.e. you’ve already worked at the company more than five years. For instance Quizlet. Just using them as an example of a late first round funding company nothing more.Now I have seen VC’s want to vest founder stock at this point. In that case no way. But when you are getting things off of the ground…..hell yes.Here is how it blows up. You start a company with two people. You both work like dogs for not even subsistence wages. After a year one founder gets a sweet offer from BigCo. Their partner is saying, you need to take that offer, they take it. No value judgement, but they keep half of the company???
Can you elaborate on the last paragraph I am confused a bit.
You and I start a company. 50-50 shares. We say we are going to take minimal or no salaries. We work 80 hr weeks. A year in a big company gives me a huge offer. My wife says: Phil quit this bullshit with LE and take the money. I quit.Now do I deserve to keep 50% of the company while you continue to work your ass off double now that I’ve left and you either have to find somebody to take shares and not get paid much or somehow come up with money?No.Do I even deserve the 12.5% that a four year, yearly, vesting would give me? You could argue for a four year cliff.But no agreement in place? My wife might say keep all of those shares.In no way am I insulting my wife here, this is a theoretical example.
I think this is yet another example of why trials (law) last so long and get down to such minutia. Because details matter.Even in the story you tell it depends on the exact conversations between the parties and what was said. Without those facts (and without a formal contract obviously) it’s hard to really judge who is right and who is wrong (if there even is such a thing). Maybe one party gave a hint that their wife could cause them to bail or maybe not. Maybe one party knew they might bail but didn’t let on that that was the case. Maybe one party made the other think what their wife wanted didn’t matter and then all of that changed. [1]So my question would be not only what did the contract say but if there is no contract what exactly transpired between the parties in conversation. (If that is even possible, might not be..)If the contract doesn’t specify anything (was left out) then it really doesn’t matter what anyone ‘deserves’. Nobody is going to potentially give up ownership (once again ‘generally’) if they are not legally obligated to by contract. To be a nice guy. Ok if reputation is important they will consider that vs. the $$ involved. Sure if a small amount of money everyone is a big shot. Large amount of money? Probably not (unless they have other wealth and doesn’t matter). Family? Different story.But for sure in advance of a contract as a general agreement would definitely want to be protected and anyone asking for that would be entirely reasonable in expecting some haircut or adjustment.[1] By the way my cousin used the ‘my wife’ excuse with me one time. He even said ‘hey I could buy a rolls royce tomorrow and my wife wouldn’t bat an eye but she just thinks I should not do business with family’. I didn’t speak with him for 15 years after that. Not because I didn’t understand or agree with that (I did) but because he wasted 2 years of my time evaluating business opportunities, that was the ‘crime’. And always led me to believe he was in complete control.
As I said. No issue with wife or spouse or partner. Just telling you where it goes. Just get it talked about and if you do that get it in writing. 100% with Fred on this one.
Good startup buddy and I discussing starting a company together, theoretically in front of two techies in their early 20’s.What is first and most important thing they ask?Detailed written agreement between us, we answer, almost in unison.Din’t Need lawyers – just write down enough scenarios and details to make any lawyer you would take it to say, ‘Well, this is going to be a problem.’Winlevii got paid by Zuck off of emails, no?
You can put in a lawyer, but you have to say get rid of complexity. Now many people especially lawyers want complexity.Why?? Complexity give you holes.I had a great Professor at Penn who was so successful in business.He said just write down the intent. Every time I go to trial they lawyers argue what was the intent. Just write it down.Let’s say you and I start a company. I put up money, time, contacts, and expertise for X. Let’s put down what those mean. I might say I get my money back first, you might say you better dedicate X amount of time, and have Y contacts. I intend for you to work 100% on this project not do side work. Or not. But let’s write that down.The problem with determining value on startups is that who the hell knows. You don’t really even know if a public company is fairly priced.Even if a VC puts up money what is it worth? If they bought common shares with no preferences or conditions then you have an idea. But they don’t do this. Why? because they are bloody sucking, greedy vc’s? No because they are putting up the one thing that you can value. Cash.I am telling you, you have no idea what your company is worth until the wire transfer clears your bank.
We are basically agreeing.Scenarios = if this happens, what do we want to do,
I don’t think vesting is appropriate in that situation
Fred, what if the founders each contributed real $$ to the start-up as opposed to going the angel or seed round route? Do you suggest they get shares specifically for the financial contributions and then treat so-called founders shares separately and vest accordingly?
Best is to convert real $$ to investors shares (or SAFE it)
As Fred said last there is no standard. Most startups founders do not put up dollars. The people that do are called investors. Now sometimes you can have a founder investor. That is me.
Different situation and should be handled differently
Strong reminder for the ICO companies where 1-2 year founders full vesting,- no matter what, is the most I have seen.ICO related Governance has a lot to be desired, still.
You know the thing that makes me most optimistic for blockchain is that it is going through the predictable cycle. First people derided it as a joke, just for buying pot, etc, then it got traction, then it hit a boom (now), it will cycle down, and then move back up.ICO’s worry me much more. This ends with people that had no money to lose going WHAT HAPPENED????
This ends with people that had no money to lose going WHAT HAPPENED????Not implying that this is positive in any way (like our graffiti discussion the other day) but there will most likely be the upside that a group of people that will be burned will then learn a very valuable lesson.But they will learn it losing $4000 instead of $400,000 later on in life. [1][1] I first learned about extending credit and how you get jerked around when I did photography in high school and an attorney refused to pay me $35 until I spent several months bugging him. I learned about tenants from the problems my Dad had. Ditto for dealing with contractors and handymen. And so on (endless list actually).Iirc it was this guy:https://www.injurylawyer.co…
ICO companies are now redefining the game, as they are responsible only to themselves, internally. Many founders had no previous experience in traditional models of fundraising, and of course, there are many hit and run schemes. Question is how the new standardized crypto-company running models will look like? Programmatic, smart contract-based approach might come out as a unified solution.
I don’t think we’re there yet. Programming / autonomous is not that easy.
Is there any harm in waiting to include founder vesting until there are investors?
What happens if a co-founder leaves after 1 year? Are you content with them owning 50% of your company? Think about this as if you were the departing founder and as if you were the remaining co-founder.
Let me get this right:I’m working on my startup. I noticed a problem, one currently solved not at all or at best poorly, where the first good solution stands to be a “must have” for essentially everyone on the Internet, used my background in pure and applied math, talents, and work to derive new applied math for the crucial core technology necessary for the first good solution for the problem, now do have the first good, and an excellent, solution and a strong technological advantage and barrier to entry. My work has no direct or very effective competition because no one else able to derive the math and build a company to solve the problem has tried.So, I used my background in software and algorithms to design, write, debug, test, time, and document the code. The code appears to run with high efficiency and as intended. It’s production quality code, not prototype or minimum viable product code. No refactoring is needed. The documentation is profuse and well written.To the users, the work will look like just a Web site. The site should work well on every end user device from workstations and desktops down to laptops, tablets, and smartphones. The code is in several programs, some for on-line for the Web site and some for off-line, e.g., some database manipulations.I’ve done all the work, and all the funding has been from my own checkbook.All the work unique to the startup has been fast, fun, and easy for me. There have been some delays due to unpredictable, exogenous interruptions independent of the work and the startup.Some equity funding could have helped reduce the effects of the interruptions and made some parts of the work go faster. But, there has been no equity funding, and I remain 100% owner.Currently I’m bringing up my first server. The top of the stack issue today is that one main memory DIMM might be faulty.I want to do some more testing of the code, have a few tweaks in mind, need to gather more data, and then will rush to alpha test, beta test, and live on the Internet, get publicity and users, run ads, and get revenue.From what I’ve seen of venture investing, an entrepreneur needs traction , which hopefully is revenue or, the best kind, earnings. So, such investment is not for just some plans on the back of an envelope and is not even for the founders’ qualifications. Instead, the investment is in a going business. And founders who have stock in that business have serious legal OWNERSHIP in a serious, significant asset. For founders to just to give up that ownership seems just absurd.Ownership of a financial asset is legally very strong stuff. If ownership is considered too strong because a co-founder might leave with certificates for the stock they own, then maybe some other financial structures should be considered.But ownership is solid stuff; that’s why people seek ownership. For my business, I own 100% of it; that’s already a good feeling; once I get some good revenue, that will be a much better feeling.There’s an old remark:Money talks. Well, so does ownership.Like the guy who started Plenty of Fish, I intend to remain a sole, solo founder with no hiring through, say, a few million dollars a year in revenue and with no equity funding.And with a few million dollars in revenue, I would have as much cash for growing the business as even a good series A round of venture funding.But there are remarks on the Internet that with publicity, some good traction as reported by ComScore, etc., some venture firms would call me.So, from Fred’s post, their deal would say, as soon as I sign their deal, suddenly I go from owning 100% of my company to owning 0% and may be able to get back to owning maybe 30% after a vesting period if I don’t get fired. And the investors on the BoD could fire me at any time for any reason or no reason. In principle, they could fire me as soon as I signed the equity funding deal in which case I would have given my company away for $0.00.Doesn’t sound like a good deal to me.I’m reminded of the story “The Little Red Hen” in Mother Goose. Why should I suspect that I could build a business without equity funding? Because the US, border to border, in villages, towns, and cities, is awash in businessmen who have done and are doing just that. Maybe they are in pizza carryout, Chinese carryout, running five McDonald’s, renting property, doing auto repair or auto body repair, renovating kitchens and bathrooms, mowing grass, running a dentist’s office, etc. Compared with such businesses, like Plenty of Fish, if my Web site is successful then my business idea will be an advantage and have less need for equity funding, not more.For the case of several co-founders, if they formed a corporation and each got stock, then they have ownership, really, serious, legal OWNERSHIP, in that business. Leave the business or not, they should not have to give up that ownership.Maybe they leave because of whatever reasons, but if the company really wants them to stay, then the company can grant some incentive compensation, e.g., salary or stock options, but only to the co-founders who stay. Then the co-founder who left has to do without the incentive.Now, if a public company sells stock, no one asks the present stockholders, employees or not, to have their stock “vested”. Heck no: They bought some stock in, say, Google, maybe way back there, and they OWN that stock and their fraction of Google. Without much such stock, they could be financially comfortable for life, and no one is saying that their deal is too good and they should “vest” what they OWN.If an investor wants to invest in my company and I accept their money, then they become a stockholder and own some fraction of the company. But, to me, no way does their investment mean that I must “vest’ my stock, no longer own any of the company, and maybe, maybe get back my stock over some years assuming I don’t leave or get fired from the company.Gee, maybe the equity investors should vest their stock? If the company C-suite no longer regards the investor as important to the company, then they get pushed out with only the stock already vested!!!Right:In business, you don’t get what you deserve. Instead, you get what you negotiate.Nothing is standard.A fool and his money are soon parted.
Vesting doesn’t need to mean zero ownership at time of financing. It is common to have some vested for time served – e.g. Start the vesting from the date you started the company, not the date of the financing.
It lets VCs be lazy and not need to understand nuances of or trust the people they are investing in, to protect their own interests only, of course. Not likely they’ll admit the lazy part – and it works for them, they get rewarded, so it perpetuates. The very best opportunities will never happen this way, assuming the founders understand the strength and value of the opportunity in the current landscape.
Then the answer is no. You can keep your money, I’ll get it elsewhere. Thanks for your consideration.
The interesting question is therefore when is this issue broached? Depending on the parties it can work to the advantage of either one if that is brought up early in the process or late in the process. If the VC has more leverage then it makes sense (to your point) to wait until later to bring it up. If the VC has less leverage then it pays to get it out of the way early. [1] Unless you want to risk ‘you can keep your money’ after putting in months or a year of work. Timing is key in the way information is laid out. [2][1] And a hundred other nuances as always.[2] I am in the process of a deal right now where the contract has a material error in it regarding fees to be paid. So I am confronted with either signing the contract or pointing out the error. The error works in my favor. By pointing it out now (I know the right number) it will be corrected. By waiting I gain the leverage of killing the deal later at my option. Why not go for that at no cost?
If there’s an error in the contract and you know about it and you would consider any other course of action other than pointing it out, you are not someone that I would want to do business with.
To clarify my comment has to do with only certain situations and contracts. Not in every case is it appropriate. (More in my reply to cavepainting if interested).
[2] is simply not the right thing to do. The partner would never forget what was done to him if you were to use this hidden leverage later.
I didn’t say what the contract was for. It’s not a partner for a deal or anything that has any ongoing implications long term.I said:I am in the process of a deal right now where the contract has a material error in it regarding fees to be paidIt is a one shot transaction pretty much. For purchase of real estate.That said it is not my business to help the other side and point out their mistakes. That is their (or their attorney’s) job to do. Not my job. If I want to consider whether I will do further business with them then everything changes obviously. This is one of the problems with either blog posts or replies to blog posts. People read what they think you mean and react to that. That’s understandable.That said I can see how my comment might be interpreted relative to a VC deal and not just a general question on when to reveal what you know so my mistake there for not being clearer.Anyway as it happens attorneys do this. I remember in fact very clearly one attorney that I hired who said ‘oh they try to get one over on us and we try to get one over on them’. And did you ever deal in a divorce situation and see what happens with that? Nobody is doing anyone any favors there or helping the other party.
Thanks for explaining the context.Maybe I am naive, but I still think this is a slippery slope. A question for you: Would you be ok if you are at the receiving end of this and realize that the other party had known all along and just taken advantage?
Easy sure 100%. That’s the sport. Live by the sword die by the sword. It’s my job to protect me and not make mistakes. Not the other guy. I put a great deal of effort and time into doing so. And I hate people who do sloppy work or are lazy and don’t do the same. Actually maybe not the case since typically that is one of the ways I try to get the edge.By the way I have been thanked for doing this. Many times. For example that attorney that I referenced thanked me for pointing out that he shouldn’t give an estimate w/o updating the client to extra time spent to the extreme. [1] So he not only cut his bill in half he thanked me for something that he never ran into at a big firm (Buchanan). Where everyone just pays the invoice. He then hired me to do some things for him. In another case a realtor put the wrong number on the sell sheet with regards to condo fees. By the time I found out the deal was close to closing. I got him to take it out of his commission. He thanked me and said he used it as an example in a sales meeting for his salesman ‘be care and don’t be sloppy’. I still do business with him to this day.[1] I figured that might be the case. But what would be the point in telling him so he could confirm? Besides at that point he would have the leverage and not me.
That feels like an emotional reaction to a very reasonable ask. But if you can get your funds from an investor who doesn’t insist on this, then you should given how strongly you feel about it
It is a totally reasonable ask. No different than preferred shares.
Its completely business. If your opening position is that I have to lockup my ownership before we start, I choose to end the negotiation and look elsewhere. Nothing more than that. If you’re worried about a founder walking out, buy insurance.
Counter-argument (with respect): If you’re so sure that you’d never walk out, then why worry about a clause that’ll never kick in?I’ve usually found that the founders who feel the strongest against vesting look at it as an investor ploy for control. This is a wrong lens IMHO. Vesting should be viewed as an agreement of commitment between co-founders & the company, which helps pre-decide a fairer distribution of value based on the time committed to the growth of the company in future.
Sure, I like respectful discussions! My view is, the company is mine. I’m selling you (the VC) a stake in that. If you’re interested in that fine, if not, I look elsewhere. VC money is expensive enough (the most expensive money an entrepreneur can take) without all these extra things, like vesting, and convertible debt, etc. My view is, its just another example of the VC taking taking at this moment when the entrepreneur is most vulnerable.If the company is early enough that the VCs are nervous about the presence of the founder, they should not be investing. If the company has some assets then this should not be necessary, insurance can solve the problem of handling the risk element.
I think that founder vesting is great. I’m departing a startup I co-founded and having firm founders restriction agreements with founder vesting is key to having an amicable separation. I can’t imagine trying to negotiate this stuff now. If I had been granted all my founder shares I wouldn’t want to give them up, but I totally get how the remaining co-founder would feel taken advantage of if that were the case.The original founder’s agreement had a buy back option (for any cause) for the vested shares, but I’d advise against accepting that because, in a very real sense, these founder shares are your payout. If you leave and the company has the option, but not the obligation, to re-purchase the shares, then you are at risk of losing any upside. So, make sure you really own your vested shares (unvested shares will of course revert to the company).There was also a clause about a forced buy back if the founder was terminated for cause. This made more sense. The buy back would be at fair market value, and of course then you have to determine fair market value. We did that by allowing both parties to hire an appraiser and then have the appraisers hire a mediator to choose any value between the appraisals.In short, to paraphrase what one of my former bosses said, nail down all these hard decisions at the beginning of the the relationship and then put the document away and hope it never comes into play.
What about solo founders that get funding?
i wonder what that category is as a percentage of all funding?
Extremely small I’m sure
Yes. A very hard thing to do.
Dan M below mentioned it but are there any resources out there that explain what happens if one of the founders is let go for cause or without cause in most agreements?”Cause” can be a tricky thing – sometimes you have to cut ties for great reasons that are hard to quantify. Curious to know how these situations are handled.
.Employment Agreements quantify this all the time. When a termination is for cause, you must possess the following elements:1. A clear definition of what constitutes “for cause” which predates the offense. By putting this in the Employment Agreement, you meet this requirement.The low hanging fruit is crimes of moral turpitude, theft, insider trading, sexual harassment, etc. There are a million exemplars out there.2. You must possess irrefutable evidence of the cause. This is where most such firings get into the mud — the fired employee contests the cause or the definition of “for cause” is murky.3. Many states require you to give an employee an opportunity to correct their behavior. This assumes it can be corrected. Many things cannot.4. The notice must be given in writing stating the offense.5. If the offense can be “cured” then the offending employee must be given an opportunity to cure it within a reasonable time period.6. If the offense is cured within that time period, then it is like going to Confession — your sins are wiped clean.7. If the offense cannot be cured, then the employee is terminated subject to the severance provisions of the Employment Agreement. Things such as Deferred Comp, options, retirement accounts come into play here, so you have to be careful.8. Smart companies use severance to buy peace even in the event of a potentially sloppy for cause firing.Remember, the “at will employment” arrangement is nullified by the presence of a contract.JLMwww.themusingsofthebigredca…
crimes of moral turpitude, theft, insider trading, sexual harassmentI would never sign an agreement which discussed any of those if the bar was simply ‘alleged’ as opposed to ‘proven in a court of law’. What does the wording in the actual agreements typically say?
.No, of course, you have to be convicted, but as a practical matter, a company is going to try to enforce a discharge “for cause” unless the charge is frivolous.A company will likely want to put an alleged perp on leave until the matter sorts itself out. Sometimes, the company will negotiate a discharge and the perp goes for it because the company does not prefer charges.A smart board will not let such a charge linger and would feel happy to discharge the perp “not for cause” and pay them a severance rather than airing soiled linen.JLMwww.themusingsofthebigredca…
Super early stage companies should look at Slicing Pie as an equitable way to split equity
Had an interesting situation along these lines happen; VC wanted the provision, two out of three founders agreed, the outliner used it as leverage against the other two or the deal wouldn’t get done. Eventually, it was sorted out but can you imagine would could’ve happened if the founder provision wasn’t required upfront in this deal.
Which is why it’s best to do it right away when you start the company
Fred, what are your thoughts on Founder refreshes once fully vested? Should they be a regular cadence based on company/individual performance? How would you structure?
This really depends on facts and circumstances at that time
@fred and other commnetors, what’s the general view on the one year cliff in the founder vesting agreements? If you’re a founder and you’re sweating from Day 1 of effort then why not reward that?.I’ve seen bad experiences of founders cutting out a member of the team just prior to the cliff so that they can effectively pull back all of those founders shares for themselves.
I don’t think a cliff makes a lot of sense for founder vesting
“sophisticated” – do you have a couple of synonyms for that word in this context?
.Fred’s blog post purports to protect the interest of founders. Founders can protect themselves with other methods. It strikes me as a control feature, something that I would want were I in a similar position, but one I would question from the perspective of a founder.First, I am in favor of immediate ownership of founder shares. I am also in favor of founders putting a bit of skin in the game (buy their founder shares) — even if it is a promissory note which accrues interest for a long time.Second, founders should have an agreement (call it a Founding Shareholders Agreement, or an Operating Agreement) wherein the duties of each founder are outlined and matters such as one co-founder wanting to leave are addressed.One of the critical provisions of the Founding Shareholders Agreement is that they will always vote in agreement with each other, thereby preventing VCs owning 20% from splitting the founders and thereby controlling the company. This feature could also be contained in a Voting Proxy, particularly when one of the founders is more experience or seasoned than the other.Third, founders should have Employment Agreements which mirror the Founding Shareholder Agreement provisions and which provide for the eventualities of resignation, termination not for cause, termination for cause, death, and disability.The Employment Agreements should provide for a steadfast term through which founders must stay as employees. It is too bad if another more attractive offer comes along. It is like marriage.The Employee Agreements would also define duties a well as notice, cure, dismissal for cause provisions as well as severance. Doing this in advance always streamlines the resolution of real problems later.VCs are decidedly lukewarm on Employment Agreements, but they are the best insurance policy one can have when something happens — as it will. They can also provide for the repurchase of founder shares at an independently determined value. [Remember that promissory note? Now, it comes into play as a credit against the re-purchase of founder shares.]Stealing founder equity under the guise of vesting is unjust enrichment. That is a bit strong, but if the shoe fits …….The core of both the Founding Shareholder and Employment Agreements is a “buy-sell” provision which doubles as a dispute resolution technique.In practice, it allows a founder to reap the value she has created during the time period she was a partner. What is the brief for the company, the VC, or the other co-founder to be unjustly enriched by the departure of a co-founder for any of resignation, termination not for cause, death or disability?With a buy-sell, the co-founder is only retaining their portion of the value created.There should be a time period during which this provision is empowered and, thereafter, it should dissolve. Three years strikes me, generally, as a fair limit.The idea of vesting of founder shares is something which has wandered into the discussion by its use in the option world.There is no reason for founders to wait until a VC appears on the horizon to paper up these real world issues. The VC will only be working for their interest — which they are literally obligated to do by law. They are fiduciaries.If Fred Wilson will only do a deal as he has dictated, then you are presented with that eventuality. If you are a serial entrepreneur, you will have a lot of other alternatives.JLMwww.themusingsofthebigredca…
“The Employee Agreements would also define duties a well as notice, cure, dismissal for cause provisions as well as severance. Doing this in advance always streamlines the resolution of real problems later.”Can you share details of what you’ve seen work well in the past for these items?**Edit: See you did elsewhere on the thread. Thanks as always for sharing some wisdom.
A keeper, read, kept, indexed, abstracted. Thanks!
this is a great post, thank you.one thought that comes to mind is that what you have laid out here seems complex. the founder vesting concept put forth by fred seems far simpler. a few questions:1. do you agree what you’re putting forth here is more complex, or am i making some faulty assumptions?2. if it is more complex, do you think cash/time/resource strapped founders (aka, the vast majority of founders) may benefit from a simpler arrangement, even if it is sub-optimal in many respects?
.Most venture funded CEOs are naive, inexperienced, and under-represented at the final negotiations with a VC.So, yes, taking care of your interests when dealing with a 57-year old VC who has done a million deals will require a bit of hard work and complexity.Make no mistake this is all about control and ease of replacement of a CEO.The use of a Founding Shareholders Agreement, Voting Proxy/Trust and Employment Agreements is pretty simple fare if you have done it before.It should be done before signing a term sheet.There are a lot of exemplars out there to “monkey see-monkey do.” This is very basic fare. I just went through this with a startup and they got if done for $3000.Here are 13 blog posts which deal with the subject of Employment Agreements alone.http://themusingsofthebigre…I don’t see the alternatives as being simple v complex. I see the alternatives as losing control of your destiny or papering up the definition of “fairness” at some future date and thereby not having to rely upon the good will of someone who has adverse interests.There is no reason why founders who own a majority of their companies should be pushed around by a VC who owns 20% and wants to exert control beyond the control owed to his share ownership.It is a complexity which may prevent a colossal problem.JLMwww.themusingsofthebigredca…
wow, this is great, thank you very much. this is definitely a subject worth beefing over, so i hope a venture capitalist or otherwise experienced individual will come in and take the other side!
This is great advice for a capital intensive startup.
Among the best most helpful and insightful blog comments I’ve ever read. Terrific and appreciated
God, yes. Speaking from experience.
I have never had it happen, but see my comment, I have seen it happen from the outside. You would think people would do the right thing……..but.
In some countries, founder vesting changes all of the founder’s (hopeful) profits from their ownership from capital gains to income, since the ownership is conditioned on the work. In some countries, this can be drastic hit in tax liability, changing 10-20% capital gains tax to 40+% in high-bracket income tax. This seems to be a high price to pay.
I have a different philosophy. If you are a founder of a startup, the success of the startup is hugely dependent on you. (Otherwise, the Company should not permit you to be a founder.) You need to make a commitment of X years, working an insane number of hours. If you quit for any reason, the Company is seriously screwed. So if quit, you have not honored the sacred promise you made to your co-founders. In which case, you should get nothing. Nada. Not one Goddamm share. In addition, your balls should be cut off and then you should be publicly executed, as an example for other founders who do not follow through. I don’t care if your mother dies, if you get divorced, if you get hit by a bus, you didn’t perform.
Hah, love the hyperbole.If you can find someone to make that level of commitment and you are willing to do the same, good on ya.People change. Goals change. Circumstances change. Vesting recognizes that.
Naw, they are a “founder”. E.g., I’m a founder, the sole founder, of my company. That means that I own 100% of the company, 100% of nutten. Founders get stock in a company that is worthless. So, the stock is worthless. Co-founders agreed that they would all get this worthless stock and, then, start working hard. They were accepted as co-founders because of a severe vetting process. If they leave soon, then they leave with worthless stock.Why be so wound up about their leaving with worthless stock?For the remaining founders, if want to reward their continuing effective, hard work with the company, then give them stock OPTIONS. These options, then, dilute the stock of the founder who left.That all seems fair enough.
As a long-term entrepreneur, here are a couple of things to think about as it pertains to founder vesting.When investors come on board, they buy x% of the company. Based on typical founder vesting provisions, if a founder leaves, his unvested shares are forfeited thereby effectively providing reverse dilution to the rest of the shareholders – including the investors who will now own x% + y%.The counter argument is that to replace a founder, all of the shareholders will now need to dilute through the issuance of new stock (with vesting) to a new hire exec. However, if the company is growing, the replacement exec will always be granted less stock than the departing founder forfeited.Don’t forget: the option pool came was created on a fully-diluted basis on a pre-money basis so the founders funded these shares.Q: since the prevailing argument in favor of founder vesting seems to hinge around fairness to the other founders, shouldn’t the forfeited shares of a departing founder transfer to the other founders?Seems the best structure for founders would be to create an LLC to be the holder of the “founder shares” with their own private operating agreement governing (1) what happens if a founder leaves for whatever reason, and (2) voting agreements so that this LLC votes as a block. The shareholder agreement can then specify that Founder LLC has X board seats, must approve X, Y, Z issues, and so on -> no different than the Investor LLCs having the same protections and structure.Secondary issue: unallocated option pool shares should also revert back to founders since they are the ones to put up the most ownership early on. Thoughts?
From just about a month ago, there isWhen you have a large number ofco-founders, the odds of someone fallingout is extremely high. Five is a bignumber.The solution is often a “Voting Trust” inwhich the co-founders agree that they willalways vote their shares as a block. …athttp://avc.com/2018/01/the-…
Interesting suggestion on the founder share LLC. I like it. A departed founder who had some/all shares vested may want to vote independently of the operating founders. How could you address that in the founder LLC scenario?
Bravo Fred! That article reminds me of the sort of stuff you used to post regularly 5 to10 years ago on this blog! Good stuff!
What would you say about a cofounder who is underperforming, stays on for a 1yr cliff, but leaves before any significant value is produced? I’m curious about how similar situations are handled. If 3 years later, the company is acquired for a massive valuation, does that early cofounder get full participation?ps If you’re ever in Seattle, I’d love to meetup. I’m unlikely to ever be in NYC since the answer to “Where should we vacation?” is never “In a massive American city!”
I have a lot of “sweat shares” of my company already. I even have taken personal debt for the company that, in my mind, the company owes me. In many ways, myself and the patience of my family have both been my own angels.So, how can I represent these quantities on a vesting scheme?
I hold this truth to be self-evident.
I think when you initially form a company, when it’s just you and maybe a couple other people, you need sit down and work out the ownership situation and every weird situation that can arise in an operating or shareholder agreement (depending on corporate entity chosen).I would generally recommend that ppl avoid unequal splits. I see a lot of situations where one guy goes full time, and others go part time but put in money, and maybe even a third or fourth person is a limited partner who *only* puts in money… these situations rarely seem to work out. It’s very difficult to say that so and so’s contribution is worth 17%. Later on these arbitrary splits will seem screwy.There is always one person working way harder than the rest and feeling like they got screwed. This almost always leads to problems.From the get go, you have to question if you’re willing to go 50/50 with the other ppl. If not, you should seriously consider walking away no matter how promising the opportunity looks.I think a situation where one person goes full time, and another person puts in only money can work out if the scope of the project is extremely clearly defined in an operating agreement — i.e. Widgetly is intent on building Widget X which is estimated to take 1 year and cost $100k to develop. Founder A goes full time for a year on engineering the widget, Founder B puts in $100k and perhaps works in a much lesser capacity, but perhaps has deep industry knowledge and experience, and the connections to help launch the business in a product management / sales capacity, and it’s a no brainer for both parties to complement each others skillsets. A situation like that can work… but again, both people need to feel like a 50/50 split feels right.In the above situation, what happens if after 1 month Founder A decides to walk away? Write it into the operating agreement… Founder B gets all assets of the company up to initial $100k investment, thereafter dissolved company assets are split between both parties.Vesting sounds like a great solution, but what happens if one founder is permanently disabled / paralyzed? Or gets divorced, and the significant other is awarded equity?There is no substitute for thinking all of these situations through and writing them out.For a non-venture backed company, I’ve always like the idea of the company being closely held by owners & employees. So when a person leaves, the company may have a period where they can buy back shares at a predetermined price. What is that price? How about 1.5x book value based off last quarterly financials (which are a fiduciary duty to produce as laid out in the operating agreement / bylaws)?In a pre-revenue company, maybe that means that someone who walks away early gets very little… but maybe that’s how it ought to be.In a cash generating company, maybe 1.5x book value isn’t really a good reflection of market value… but hopefully while you are an owner / employee you are getting great year end dividends on your shares?Wait, you don’t want dividends, you didn’t want this to be a closely held, cash generating company and you thought you were going to IPO someday with billion dollar valuations? Should have talked about the long term vision when you sat down and drafted an operating / shareholder’s agreement.I think it’s way more important to go in with ppl where you split the pie equally and lay out a common vision for what the company looks like at maturity. You should be able to talk about all the crappy situations that can happen.You don’t need to spend $3k on legal fees in the beginning. Go to Nolo.com, buy one of their operating agreement books, literally use it as a template and start modifying it based on everything you talk about. Maybe pay for an hour of legal review, but seriously don’t spend thousands of dollars.After you fail in your first or second business, you’ll have an operating / shareholder’s agreement that’s been through a lot of eyeballs.The better place to spend your time is giving deep consideration to the other person / people that you are starting a business with.