

What is the vesting period for co-founders in a start up? - hajiss

I know that the vesting period is the period of time before shares are owned unconditionally by an employee in an employee stock option plan. If his/her employment terminates before this period ends, the company can buy back the shares at their original price.<p>But if you award a co-founder x # of shares to be vested at x period of time during the critical phase of the start up life-cycle, how do you determine when to vest? 1, 2, 3 years... Assuming that the whole purpose of the process is to make sure that this person sticks around and earn their equity share. What if the person stop participating before the vesting period, do you have to buy back his/her shares or they just lost it?
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markstansbury
All the advice that I've seen, from lawyers to VCs, suggests periodic vesting.
You want to have shares vest in equal increments every day, week, or month.
Any longer than that and you're asking for trouble, like pre-vesting firings
and the resulting bad-faith lawsuit.

The whole idea is to make vesting proportionate to work. So you don't want
full vesting on day one. Your co-founder could quit on day two and leech the
next few years of your hard work. (Plus any VC is going to make you revise
that.) But you also don't want someone putting in three years of work and
never vesting.

I would probably go with monthly to make it fair and easy.

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hajiss
thanks for your answer Markstansbury, let say the co founder owns 35% of the
company...in a typical start up, when do you allow them to vest the last
portion? after a year, 2 years or when the company gets profitable?

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markstansbury
Do you mean the last 15% to bring to 50% ownership?

Without knowing the specifics I would think the best idea is to vest
incrementally every week or so. Also make sure you've got accelerated vesting
upon sale or IPO. (That's a nice thing to give your employees too.) And
consider a right to buy back shares at cost upon for-cause termination.

I've never seen or heard of vesting upon profitability. I don't know if that's
something that is done, but I would be hesitant to be on either side of that
deal.

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ashish_0x90
Another idea would be a combination of cliff date + continuous periodic
vesting past the cliff date.

A different approach to co-founders vesting that I read about earlier -
Performance based equity vesting instead of the more common time based one.
you can read more on this at the link given below :-

[http://answers.onstartups.com/questions/3056/is-
performance-...](http://answers.onstartups.com/questions/3056/is-performance-
based-equity-vesting-possible)

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michael_dorfman
How long is a piece of string?

Choose your vesting period based on the incentives you wish to give the
recipient.

Put another way-- first, figure out exactly what it is you are trying to
encourage/discourage, and once you have that in mind, pick a vesting system
that fits.

If, for example, your goal is to keep a key employee on board for a long time,
you might designate a chunk of shares to them, and vest them in 20% increments
on an annual basis. If the person leaves after 3 years, they get 60% of the
shares. Etc.

Note that depending on your jurisdiction, there may be tax implications of any
kind of stock option plan-- be sure to check with your lawyer/financial
advisor before finalizing any arrangements.

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skowmunk
Generally, the longer your co-founder remains a stakeholder, the longer he/she
is going to be an 'asset' to your company, even if they are not actively
involved in the company.

At the same time, not allowing them to cash in for a very long time, could
backfire as they may become frustated and start being a pain.

A good balance might be to have a staggered vesting period for different
percentages. example: if their total stake is 35%, then let them divest, in
increments of 5% (max) each year, starting from end of year 2.

End of the day, you have to figure out what is the best and a reasonable
configuration (for both parties) that will sustain your company while
rewarding those early contributors.

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xg
Standard is a 4 year vesting period. So, for example, if a cofounder had
100,000 shares, they would vest 25k shares each year--possibly with a one year
cliff.

If you've already put considerable work into a company prior to any financing
event, etc, it's common to keep 50% of your equity upfront and vest into the
remaining 50% over a four year period.

Continuous periodic vesting is important. It's usually set at a quarterly or
less time interval for the reasons mentioned by markstansbury.

