Equity Vesting

Even when you decide on the allocation of equity among founders, this does not mean that this equity is all issued and effective day one. Provisions need to be put in place so that they equity “vests” over a period of time. What that means is that each of the founders must earn their equity by contributing to building value in the enterprise. If co-founders got their shares all at once, there would be nothing stopping them from performing and staying in the business over a business of time. The most common vesting terms are those that occur monthly or quarterly over three or four years.

“Think about this ahead of time.” 

Things to consider around equity vesting

By creating a vesting schedule over multiple years you’re encouraging everyone to earn their keep. Plus, investors will expect a market-typical vesting schedule, and not having one wouldn’t be a great sign. Remember that you’re not doing this just because investors expect it. You are doing it because you will create very significant enterprise risks if one of the members of the founding team picks up and leaves for the beach and you are forced to use dilutive equity to bring on replacement talent; not to mention you don’t want to create any incentives for a free ride. Among other things, this should help you address questions like:

  • Is the percentage ownership subject to vesting based on continued participation in the business?
  • If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?

This will require you to think through different scenarios depending on the structure of your company.  We’re here to help!

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