If you are capital raising as a founder of a startup, potential investors will mention vesting requirements for you and other founders.
We have explained below what founder vesting is, and what you might need to negotiate.
What is vesting?
Founder vesting is the concept that a founder’s ownership of the company is earned over time, like a salary.
Technically speaking, this is ‘reverse’ vesting – a founder has shares at the beginning, but if the founder leaves the company, decreasing proportion of the shares held by the founder (related to the time the founder has been with the company) have to be sold back to the company, usually at no profit.
Why do investors want vesting?
Founder vesting helps to avoid a founder leaving early on in the life of a startup with a large equity stake. This is really important as that may make the startup uninvestable in the future. Vesting is intended protect both investors and the company.
What does vesting look like?
Typically if a founder leaves the company before the end of the first year, all the shares will have to be sold back to the company at no profit. This is known as the ‘cliff period’.
After the cliff period, a percentage of the shares will vest each month to the founder until all the shares have vested. The founder will own the vested shares outright without the requirement for the shares to have to be sold back to the company at no profit. You should note, however, that there are likely to restrictions on transfer of the shares in the articles of association and the investment agreement.
The table below set out an example vesting schedule over a 4-year period:
Period of time Shares vested
Up to 1 year 0%
At year 125%
At year 250%
At year 375%
At year 4100%
What do I need to think about with founder vesting?
As a founder, you should consider the following issues, and whether they will be the same for each founder:
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