Vesting

Aspects of your company’s vesting policies may be negotiated in your term sheet. Depending on what the investors are hoping to affect, this term may appear as “founder vesting,” “founder and employee vesting,” or simply, “vesting.”

For more on the basics of vesting, visit our primer on ownership.

dangerWhen getting started, many founding teams delay legally outlining the terms of their vesting. Often this is because the founding team trusts each other and believes it is safe to figure out the terms of their ownership later. This is always a mistake. Founders also get into trouble when they decide not to use a vesting schedule but instead give each founder a share of the company that is fully vested on day one. This practice is the cause of endless headaches and can ruin long-held relationships. Consider the following scenario. Three founders start a company, they’ve been friends since high school, they trust each other, and everyone says they’re committed for the next ten years. As a result, they agree not to utilize a vesting schedule. Two years later, two founders agree to fire the third founder for inappropriate behavior. Since they didn’t utilize a vesting schedule, the third founder will continue to hold their full share of the company; had they used a standard vesting schedule, they would hold half as much. This failure to utilize vesting is why investors usually require founders to all be on a vesting schedule, just like employees.

Definition Accelerated vesting (or acceleration) is vesting that occurs outside the vesting schedule and is triggered by contractually specified events. Single trigger requires only one event, such as the sale of the company, for accelerated vesting to occur. Double trigger requires two events, generally the sale of the company plus the person involuntarily leaving the company without being fired for cause.*

caution Investors sometimes try to negotiate down the percentage of stock that gets accelerated. According to Fenwick & West, 100% double-trigger acceleration is standard for founders, but many venture firms think 50% or one year of acceleration is standard. Founders should push for 100%. It isn’t a transfer of wealth from investors to founders, because the acceleration is only triggered if the founders are terminated in connection with a change of control of the business.

When raising a priced round, almost every venture capital firm will require founders to reset the vesting clock on their stock at the time that the deal closes, especially when founders have already vested more than 25% of their stock. For example, if you’ve been working on your company for two years on a standard four-year vesting schedule with a one-year cliff, you will have one half of your stock vested. Revesting requires the founder to restart their vesting. This can be a touchy negotiating item for founders who have spent two to three years working on something. Naturally, they feel entitled to vested ownership in the company they’ve been working on for so long. Investors’ motives here are not sinister. They are betting on the founders and want to see founders show they are committed to the company for the long-haul. Take this as a compliment: they want to make sure you continue to run your business.

If founders have been working on the company for a significant period of time prior to fundraising but are only just now incorporating, it is not uncommon for term sheets to include a small vesting balance to compensate the founders for their work. If the founders have been working on the company for two years but are only now incorporating, instead of starting their vesting on the date of incorporation, a vesting balance would vest some stock for the founders to recognize the time they worked prior to incorporation.

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