Should co-founders vest in their equity?

Should co-founders vest in their equity?

Lots of founders – everyone who hasn’t been down this road and some who have – feel that because they started the company, because it is, at that point, “their” company, none of the co-founders should have vesting. And they’re right: at that stage, everyone is committed, has a shared vision, and no back-up plan.

But as a startup lawyer, it’s my job to see possible futures. I tell all startup co-founders that they need to consider founder vesting because sometimes one will leave or not do well or whatever. It really happens. I have a client whose two senior folks had known each other for years. About 3 months in, the board removed one because expectations weren’t being met. Vesting of that person’s 40%+ stake probably saved the company from dying right there.

I’m seeing a similar dispute now, and I’ve done another recently, where a company didn’t impose vesting and a person left or drifted away. Companies get really grumpy about that, but it’s their fault (and the lawyer’s!). No matter what one thinks about the merits on either side, it’s clear that a lot of management time and attention is wasted on resolving situations that would have been clear with vesting. It’s not the first time I’ve quoted it, and it won’t be the last: “Good fences make good neighbors.

So it’s no secret to say that you should absolutely consider vesting. Implementing it or not can come down to whether either cofounder would begrudge the other keeping 50% of the company after walking away tomorrow. That’s very seldom the case. And, when you take your initial zeal and project it a year into the future, it’s less likely to be true.

A good startup lawyer can help co-founders structure vesting in a way that doesn’t result in a windfall for employees from unvested shares but instead shifts that equity to the cofounder who’s staying.

Finally, another reason to impose vesting: virtually all VCs will impose vesting on founders if there isn’t any, and they will be less generous in crediting past service than the founders would normally be to themselves.

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