Vesting, vesting, vesting

Please do it, it is your best start-up friend

Vesting shares is popular within the start-up communty, and despite the fact I always tend to hear that it is more related to investors trying to make sure entrepreneurs stick to their respective projects, it is also very important to protect entrepreneur from their fellow co-founders.

For investors, it is a great tool to make sure incentives are aligned. I am giving you all this money now, and your collaboration and execution of the project will take place in a period of time. It is not reasonable for you to have all the shares right on. What happens if you are not the right person and you need to be replaced? What happens if you find your dream job and you leave the project behind? What happens if you pass away? Well, vesting allows the project to keep some of the shares if one of those scenarios happen, so you can find someone else to replace the departing entrepreneur.

For entrepreneurs it is equally important, if not more. You co-founded your dream project with a partner. Got seed financing an each of you have, let’s say 30% of the company. Because you knew and trusted each other a lot, you opted it was not necessary to vest shares and the seed investor didn’t push for that either. Fast forward one year: your co-founded decides to move to the other side of the world for a sabbatical with a new girl he met. So? Why he has to have 30% of the company when he only worked for one year? How on earth I am going to find another partner, which I need, to take a below the market salary without having the ability to give him equity? Well, you are screwed, and vesting helps a lot on those situations.

I have suffered non-vesting situations on some investments and it sucked. One departing co-founder fighting with the other two that were staying, and everybody ended up buying an equity stake to the departing guy (who didn’t deserve it). Also projects in which entrepreneurs start slacking and you wanna replace them, without vesting it is hard the to incentivize a newcomer.

There are plenty of guides on the web, but the most common agreement involves a 4-year vesting period with a one-year cliff. Trust me, you will love vesting when things go awkward, unless you are the sabbatical guy and you want to screw your partners.