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Summary:

This is the first in a series of Venture Hacks articles on how to get the most out of your founder’s equity. “By the time we did the financing we had been working on [the company for] 2 years, but they only vested us a year. […]

This is the first in a series of Venture Hacks articles on how to get the most out of your founder’s equity.

“By the time we did the financing we had been working on [the company for] 2 years, but they only vested us a year. So, they got a year of free vesting from us.”

Joe Kraus, Founders at Work

Summary: Don’t agree to vest all of your shares just because it is supposedly “standard”. Get vested for time served building the business.

Your Series A investors will ask you to give all your founder’s shares back to the company and earn your shares back over four years. This is called vesting — see Brad Feld’s article on vesting if you need a primer.

Vesting is a good idea:

You are critical to the company and you have told your investors that you are committed to the business. They are simply asking you to put your shares where your mouth is: a vesting schedule demonstrates your commitment to the company.

Vesting also ensures that a co-founder who leaves the company early doesn’t receive the same amount of equity as co-founders who stay in the business.

Get vested for time served building the business.

But don’t agree to vest all of your shares just because it is supposedly “standard”.

If you have been working on the company full-time for one year, 25% of your shares should be vested up-front and the balance of your shares should vest over three to four years. The best vesting agreement we have seen for a founder in a Series A is 25% of shares vested up-front with the balance vesting over three years.

You should argue that,

“New employees who join the company today will earn all their shares over four years. Employees who are already here should be credited for their time served.”

We don’t recommend trying to escape a four-year commitment to the company (including time served). Four years is the typical commitment for a start up, high school, or college, as well as the span between Olympics and World Cups, and the term we give our Presidents to start as many wars as possible.

Consider cliffs for newfound co-founders.

One-year cliffs are typical for employees but currently rare for founders.

Nevertheless, consider negotiating one-year cliffs with newfound co-founders whom you haven’t worked with in the past. If a co-founder leaves the company after three months, you don’t want him walking out the door with a large chunk of the company.

Note: See the rest of the venture hacks. Thanks go to Mark Fletcher for reviewing this hack. This is not legal advice.

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  1. should you arrange for a vesting schedule amongst co-founders even before receiving financing?}

  2. Aydin, is there any reason to wait until the financing to paper the vesting agreements?}

  3. this is great}

  4. In response to Aydin, co-founders rarely have vesting schedules between themselves prefunding. There are a couple of issues with doing this: 1) typically, vestingis something the VCs want but founders don’t. If you do it to yourselves, you’ll never get away from it once the VCs enter the picture & it won’t deter them from even trying to take away from whatever you’ve already vested on your schedule, 2) this will send troubling signals to the VCs. They will legitimately wonder if you did it because you weren’t sure whether one of you was going to stick around. But that is counter to the core of being a founder…which is your absolute commitment to the business until the business no longer needs you. If the VCs believe that that commitment doesn’t exist, the credibility of the entire team will suffer and they will (justifiably) exploit it to your disadvantage. BTW – if a potential founder doesn’t have that commitment, make them the first employee with a slug of options that vest without a cliff…not a founder. Other differences between founders, such as centrality of the skillset or expected roles should preferably be dealt with through the AMOUNT of equity distributed to each, not through a vesting schedule. This deserves more explanation but when a founder without vesting does decide to leave, often it gets dealt with through a lot of peer pressure to sell back a portion or all of their shares. Hope it helps. And to Babak and Naval, great article.}

  5. Bill, thanks so much for the response. You made excellent points. I agree… very wise comments indeed :) Babak, the reason I brought this up is because our lawyer was trying to push this amongst the founders… I guess he brought on some doubt amongst the founders in the beginning… we did decide not to go with a vesting schedule because as Bill eloquently mentioned, we realized that it does make us look like we don’t even trust in ourselves as founders. I have to say, this was an excellent article and a great source of information.}

  6. Bill, Aydin,

    I don’t really see why co-founders shouldn’t have vesting schedules. Your co-founders may be the most trustworthy people in the universe. But they still may have to leave the business due to unforseen circumstances.

    What if they have a child and need to get a job immediately for cashflow. What if they fall ill? What if their father falls ill and they have to take care of him for a year?

    Do you really want to use peer pressure to buy back your co-founder’s shares at that point?}

  7. adambenayoun Friday, April 27, 2007

    Nivi, Naval,
    Wonderful article, very informative and made me ponder about what kind of experience and reading i should aquire.
    We are a small startup composed of 3 founders, without equal equity, we never though or knew about vesting terms (Its our first startup), but we did put on paper that we need to commity at least 2 full years before being able to walk out of the business.
    I dont think we really though about trusting issue in this case, we know each other for over 10 years, we are just realist and we understand that the startup is a new form of life that need to be secured by locking its founders/parents (including myself).
    You never know what can happen in the future.}

  8. FoundLINKS: Feb 17 – Feb 23 « FoundRead Sunday, February 24, 2008

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    [...] funding advice, under Hacks. For more, read Nivi’s early Found|READ series on Vesting Hacks: Vesting Hacks: Part I Vesting Hacks: Part II Vesting Hacks: Part 3 Vesting Hacks: Part 4 No comments Share/Send [...]

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