To vest or not to vest cofounder shares

It’s common knowledge that employees must vest their stock options over time.

When I first got started in the startup world over 10 years ago, vesting schedules were typically 48 months on a 12 month cliff. A cliff is a stipulation dictating that if someone leaves the company before a pre-determined length of time (in this example 12 months), the leaving person loses 100 per cent of their equity. (For those of you who don’t know the mechanics of vesting, I wrote about it here a year ago.)

More recently, 36 month vesting on a six-month cliff seems to be more and more common. That’s no doubt a good thing for employees.

Employee stock options and vesting are topics that come up all the time when I meet with founders, but they’re always surprised when I ask them about their founder shares’ vesting schedule.

“What do you mean, ‘are my shares vesting?,’” says virtually every early-stage CEO I meet.

In the early days of your startup, the thought of you and your co-founders “breaking up” never crosses your mind, nor does the the potential of firing a cofounder. You’re so excited about the opportunity you’re tackling and the people you’re doing it with. But it happens, and more often than you may think, too!

Stop to think a minute. What if two years down the line, you and your cofounders part ways? Would you let that person leave with a large portion of the business while you keep working on the business?

Here are a few simplistic examples:

Scenario 1: No cofounder vesting in place

You and your three partners launch the business, each with 25 per cent ownership. After 24 months, one of your cofounders decides they need to leave the company. You didn’t have vesting in effect so they keep their 25 per cent stake. In year five you have a successful exit. They get as much of the upside as you do, even if you worked three years more than them. But you played a much larger role in the success story than they did.

In this scenario, it sucks to be you!

Scenario 2: Cofounder vesting is in place

From the get-go, a vesting schedule is in place. The four of you agree to each own 25 per cent of the business after 36 months. In this scenario, the person who leaves after 24 months hasn’t completely vested so they only own 2/3 of their 25 percent (16 per cent ownership) at their departure. At the time of your exit in year five, the other 9 per cent this person didn’t vest is shared amongst you and the remaining team.

Much better, wouldn’t you think?

Cofounders and employees shouldn’t be treated differently when it comes to implementing vesting or not. If you’re so lucky to have a successful exit, only those who gave it all they had should get a piece of the pie. It’s the only way it’s fair for all.

I’ll end by adding that unless you’ve been working on the business for many years already, cofounder vesting is usually something investors will impose when you raise capital.

The way I see it, best you set yourself up early. You’ll be protected, investors will think you’re smart and you’ll be starting things off on the right foot. It makes sense all around, so just do it!

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*This article was originally published on MTLinTECH