Why I’m excited to own 0% of my startup
My thoughts on founder vesting and why the founders of Bliss chose to slowly vest into our founder stock.
The practice of vesting terms for founders is commonplace. The exact terms, however, are an ongoing debate across the startup world. The basis, though, remains in tact: Founding team members must earn their share of the company by providing value.
In my opinion, the best founder vesting terms for startups consists of 2 main points:
1) A four-year vesting period
2) A one-year cliff
While these terms are common for employees, they are less so for founders. Most founders I know seek to implement a quicker vesting schedule than this. Here’s some specific examples of terms I’ve seen founders use to gain legal ownership in a timely fashion:
Backdating — (1) The founders either lie about their start date or (2) the founders start working together on one concept that completely changes to a different idea over time and they claim the start date of the original concept rather than the new idea, which actually becomes the business!
No cliff or shorter vesting period — Here, the founders just don’t have the patience to wait the normal four years. They elect to implement some semblance of vesting schedule, but are more in it for a payday rather than the long term vision.
No vest — This one is the cardinal sin! One of the most common issues at the beginning of a startup is troubles amongst founders. If there’s no vesting period for shares and a founder walks away, she does so with a material amount of equity without earning it! This missing chunk of equity will come back to haunt you time and time again as you grow your business.
Furthermore, even if all the founders remain, to me, this is still a red flag on culture — the founders are trying to optimize for all the wrong reasons.
First-hand experience
Having founded a few startups together (and also invested in / advised a handful more) the vesting discussion between Ian and myself is, fortunately, simple and straightforward.
As much as we trust each other and have enjoyed working together for several years, there’s simply no way we’re going to alter founder vesting terms on any new business we start together.
For Bliss we’ve taken it one step further. Inspired by this article from Jason Lemkin on SaaStr, our vesting doesn’t even start until we’ve at least raised $500k!
We started fundraising for our seed round ~2 months ago and have had some initial momentum, but dealing with the summer vacation schedules of potential investors, the full $500k could easily slip until Q4.
In the article noted above, Jason challenges SaaS founders to vest over 5 years and have the cliff start one year after closing a seed round. We tried to have our founder vesting terms more in line with Jason’s challenge, but our legal counsel encouraged us towards the terms above mainly to keep things simple, but we implemented the seed round stipulation — a new clause for Ian and I.
“It takes 7–10 years to build something real”
“There’s no tornado, no viral explosion in SaaS. There’s not going to be any Instagram insta-hit. There’s zero value in SaaS until you’ve at least built a real business, with real customers.”
We agree with these insights from Jason and combined with our general beliefs in founder vesting, we’re happy to not start our 1-year cliff until we’ve closed on our first $500k from outside investors.
So, even though Bliss was originally developed last summer in our previous company (as an internal tool) and we’ve been working 24/7 on this one idea all of 2015, if Ian or I leave ~14 months from today we’ll get nothing!
Despite our initial traction with revenue and customers, we realize that we still have a long way to go and trying to optimize for ownership now is like hoarding monopoly money — it’s worthless!
Key takeaway
We realize most founders aren’t in the position we are, going on a third company together. The shares/vesting conversation is a difficult one, but it needs to happen. Getting this on paper early removes uncertainty and assures the founding team is on the same path. Furthermore, if you and your co-founders can’t work through this discussion it should raise red flags about your future as there will be many more difficult challenges and conversations down the road.
Published in Startups, Wanderlust, and Life Hacking
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