Founder Vesting

Check out the Startup Conference on May 17 in Silicon Valley.

The same question comes back over and over: I started a company with someone else. We split 50/50, and now I’m fed up with my co-founder not doing anything. Except he is refusing to leave and barely answers my e-mails.

Have you heard of Vesting?

Vesting is a fancy way to say that you have to earn your shares. You can trust Silicon Valley when it comes to startup deals: we have them all here, crazy successful startups, and also thousands of dead, half-dead and zombies ones too. We are used to both success and failure. So don’t reinvent the wheel unless you are those guys.

A typical deal for a founder is to have their shares vest over a period of four years. So even though you are maybe being promised 30% of the company, what it really means is that you are getting, say 3M shares (out of 10M), but you’ll get to keep them all only if you are still with the company four years later. If you leave anytime before (really, if your other co-founders or investors fire you), then you’ll lose whatever fraction has not vested yet. If you are out after two years, you keep 1.5M shares. If you get kicked out after 1 year, all you have to show for having been a co-founder are 750K shares.

While employees also have vesting, co-founders typically get a better deal. This is a technicality, but an important one to keep your taxes low: you’ll own all the shares upfront, but the company has the right to purchase back the unvested shares.

So you’ll get all 3M shares on day one. You’ll have to pay for them by the way, but they’ll be super-cheap, so it could cost you as little as a few hundred dollars. Having those shares upfront is great: you are a real shareholder, they give you power. But again, if you get kicked out, the company will basically refund you the same few hundred dollars and get your shares back.

Can I Fall Off a Cliff?

A 1-year cliff is often used for employee stock options. It means that if the employee doesn’t work out and stays less than one year with the company, they lose all their stock-options. It works a bit differently for founders.

Founders usually collect no salary (they should, but that’s a different issue). It would be grossly unfair if a founder worked hard at a startup for close to a year, only to get kicked out and lose everything. Instead, founders typically have no cliff at all.

Just be careful about one issue: do not sign up a co-founder until you have worked with them long enough to know it’s going to work out. Long enough should be 1–3 months. If you need to incorporate early with a co-founder you don’t really know, then a 3-month cliff makes sense. Just think of it as a trial period, and be upfront about it to your co-founder.

Additional reading: how to find a cofounder. Doers.