Startup Law Basics

Founder Vesting

27. March 2012 · Category: Startup Law Basics

It’s a harsh reality but many start-ups break up or lose co-founders. The last thing you want is to have someone with a large share of the company doing nothing while the company grows. If you are looking to get acquired or raise investment it will be a key question you will be asked. Chris Dixon, one of the top VC’s in the US says that founder vesting terms are the most important part of a startup term sheet.

The idea of vesting is straight forward. Instead of founders getting all the common stock issued on the launch day, a ‘vesting schedule’ is setup. A typical schedule might provide for four years of vesting with a one year ‘cliff ‘and monthly vesting thereafter until the founders reach 100%. A one year cliff means that the founders do not get vested with any stock at all until the first year has passed. After that, the founders get allocated some stock every month of the their total common stock.

To be clear, this means that if a founder leaves in the first year, they will get nothing. If a founder leaves after 15 months, the founder will have 31.25% of his common stock vested (25% after the first year, plus the 2.08% vesting each month for 3 months). Thus, the missing founder leaves the startup with much less shares than if the founders stock had vested immediately. This makes it easier to get the necessary approval  to go for an acquisition or venture capital financing.

This is by no means the only vesting option and another good example is here. The key is to learn as much as you can before you decide exactly how to vest shares.

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