
What Happens When a Founder Is Fully Vested? - vinnyglennon
https://avc.com/2018/11/what-happens-when-a-founder-is-fully-vested/
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8f2ab37a-ed6c
It's a frustrating and uncertain place to be as a founder.

You're being paid peanuts compared to what you could be making in the industry
(generally your comp is garbage until maybe Series C) and your equity is
already as good as it's ever going to get, so some reasons to stay behind are:

1\. you're really enjoying the gig

2\. you think that by you staying behind, the overall worth of your equity
will be higher than by having someone else take over

3\. you think that quitting at that stage will be a permanent black mark on
your record, the captain abandoned the ship

4\. you're totally out of money after years of trying to make ends meet with a
startup founder gig, so you can't start a new company without spending a year
or two working for someone else first

There's real opportunity cost to sticking around. You could be starting a new
business and begin another 4 year vesting countdown there. Maybe you're ok
working for someone else, you could be at Google collecting a 1/2M paycheck,
feeling like you're on vacation compared to a growth stage CEO job. Maybe you
just want to take a breather and actually have time for your spouse and kids
for a little bit, before another dive.

Tricky spot.

~~~
jchendy
> you could be at Google collecting a 1/2M paycheck

That's director-level compensation. Would somebody whose only experience is
4-5 years of running a startup be hired straight into a director role?

~~~
8f2ab37a-ed6c
If you interview well and have competing offers from large firms that shell
out good cash, you can get that as a senior dev. Networking helps a lot, if
you have the right friends working there, they'll make sure you interview with
the right people.

~~~
morgante
1-2M is way above market for a "senior dev." Even for the top companies, that
tier is reserved for truly outstanding performers who have launched major
projects/innovations.

~~~
fierro
Yeah he said 500k. I Initially thought the same as you, 1-2mil.

500k for a senior dev is actually not too far out there. I have an L3 friend
at Google (l3 is new hire level) who has been at the company for almost 2
years and who's total comp is almost 300k. So some L5s and L6s could certainly
be pulling in 500k.

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Negitivefrags
What a strange perspective.

This piece seems to assume that founders of a company are just some kind of
super-employee of the VC that are only going to be around so long as they are
getting regular compensation.

That isn't how it's supposed to work. The founder has to believe they create
the value. They don't work to get grants of stock, they work to increase the
value of the stock. They created all the stock in the first place!

If they think that they could just hire someone else to do their job and
everything would just turn out the same then what the hell did they even found
the company for in the first place?

The way VC is set up in the valley has warped peoples understanding of what a
business even is.

~~~
beaner
Didn't even realize founder's equity vested. I thought since they created the
company, they owned it since day 1.

~~~
tptacek
No. All operator equity vests. Any potential partner who demands unvested
equity is one you should avoid. Vesting protects cofounders as much as it
protects money investors.

~~~
voidmain
I've co-founded four companies with seven distinct co-founders, raised angel
and venture funding, and had two very successful exits. I've never had vesting
for any founder at any stage, and never had cause to wish for it in hindsight.

There are advantages and disadvantages to founder vesting and they are
situational. Recommending it as a default may very well be good zeroth order
advice for beginners, but your position is way too strong.

A start on thinking about why it might not always be the best way to keep a
team together is to look up the "israeli day care study".

~~~
zbruhnke
Here, I’ll be the first to provide a perspective from the other “other” side
of this argument. I am a founder who once had a vesting schedule with a cliff
(one year). I built the first version of a venture backed company as the CTO,
we had backing from investors you’ve heard of.

The product went live and was even used by some people. Eventually I ended up
in a place where it was clear to me I disagreed with the direction of the
business and the CEO leading it. I for one am glad there was a cliff.

Because I left and when I did my co-founders continued to work on that
business. As far as I know they’re still at it.

That was over six years ago. The code I wrote is likely of VERY little value
in the grand scheme of things.

The value I added in thoughts, ideas, advice etc. is probably about as
valuable as people my co-founders have had several dinners with over the years
at this point. If I had walked away with 1/3 of the equity that would have put
the other two co-founders in a horrible situation and would have been
completely unfair of me to do.

The cliff did its job. You vest to protect all parties and because it’s just
the right thing to do. Take it from someone who walked off the “cliff”.

I’ve started multiple companies since then. Each has had a vesting schedule
and a cliff for all founders.

~~~
voidmain
Yes, if you want to be able to walk away with a clean conscience, you should
definitely have vesting.

That's not what everyone is going for.

~~~
tptacek
Can you help me understand why you would want a company structure that was
designed _not_ to survive the departure of a founder?

~~~
x0x0
Further, lots of people don't seem to understand the job changes.

Take cto. When it's founders and maybe an employee, cto is a full-time dev.

Then you get funded, and four months later the engineering team is 4-6 people.
The cto is now a line-level manager who codes a bit. It's a completely
different job.

Then you get the next round, and suddenly the cto supervises 2-4 line level
eng managers and has to decide if (s)he wants to be cto or dir-eng, because
those roles are about or have already split. This, also, is a completely
different job.

At each step, it's a completely different job.

Your company needs to be prepared for founders who don't want, can't, or
aren't good enough at the next step that is required of them. Because the job
literally completely changes every 2 years. Or sooner.

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zaroth
Large shareholder-employees stick around because they believe they can grow
the value of their company.

A CEO owning double digit share of their company doesn’t need more _shares_.
What they want and need, most of all, is dry powder to _grow_.

Secondary to a large war chest comprised of equity pool and cash to pay
salaries, is a decent salary for themselves to keep the family happy with
their living conditions while the CEO is basically unavailable as a partner,
off trying to grow their company.

I’m surprised that the blog post seems to miss this? I generally have high
regard for AVC posts.

A CEO/Founder is never going to be able to double the size of their slice of
the pie. While the CEO/Founder is absolutely crucial in doubling the size of
the overall pie. At 4 years in I’d say most VC funded companies are still
aiming to be 10x’ing the size of their pie at the least.

An equity grant at 4 years in should be totally irrelevant. Deck chairs on the
titanic. A little anti-dillusion is nice but not necessary. It’s all about the
size of the pie, not the slices, at that point. And growing the pie requires
funding on good terms, and massive focus and execution. Generally that means
long hours and time away from home, for which a $200k salary helps
tremendously to keep the family on board for the voyage.

~~~
motohagiography
This idea of keeping the family happy suggests a niche market unto itself. I
can think of a few services that would make that easier. There are a bunch of
high end concierge services out there, but one that focused on founder
families is like an extended family office. Gears turning.

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verelo
This in my mind doesn't address two key items (unless I somehow missed it?)

1) If you truly care about the business, and it's not just a numbers game, you
might have some emotional attachment to the product, and the people working
for the company. This complicates things for everyone.

2) Leaving will likely devalue your stock. Bad for investors, probably worse
for you (as it's likely your largest asset). Pulling yourself out unless the
company is in a super strong position, with a likely high chance of hiring a
good replacement may not be super smart for your own finances.

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joshfraser
Investors are usually diversified, holding stakes in lots of different
companies. Meanwhile, founders are usually all in with all their eggs in one
basket (albeit a basket they are guarding intently). An alternative to asking
for more equity is to negotiate for a higher salary, and using those funds to
diversify your holdings. As you'd expect, this conversation is easy if the
business is going well, and isn't if it's not.

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plinkplonk
I have a question - Is founder vesting standard outside the valley/software
startups?

If I and my partner set out to build (say) a restaurant franchise in Texas, do
4 year vesting schedules, cliffs, etc make their way into incorporation
documents? How do things work in non-silicon-valley-startup businesses?

Either vesting is a part of standard business incorporation (in which case I
don't see why it needs special discussion in a software startup context, we
don't need to discuss whether a company should have annual or quarterly
balance sheets, for example - such 'standard elements' are taken for granted)
or it is highly software startup specific (in which case there might be
interesting rationales for such provisions existing that are specific to
software, software startups, or conventions of SV VCs)

~~~
ThrustVectoring
Software is somewhat unique in that it takes relatively little capital to
start a business, outside of the sweat equity that the founding team puts in.

If you're opening a restaurant in Texas with someone, you're looking at
something like $100k to $250k each, depending on local regulations and what
kind of scale you want.

~~~
albertgoeswoof
It’s more that software is way riskier and unknown, so you’re forced to go
with tougher demands from VCs instead of more traditional investors/debt

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davidu
This is a good post and it was pretty comprehensive. Worth noting however,
that there are many more hairy solutions Fred didn't raise.

For instance, some founders will negotiate a grant upon IPO or upon sale of a
company beyond $x dollars as a way to try and align interests with investors.
The problem with those is that it can cause unnatural behavior (eg, Snapchat
IPO'd too soon, I'd argue, because Evan's investors gave him a grant that
vested upon a qualified IPO exceeding a certain price. Or the tax issues late-
breaking grants can create upon a trigger.)

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YPCrumble
> the company would have to go out and hire a new CEO and that new CEO would
> get an equity grant that would be between 2.5% and 7.5% of the Company,
> depending on the value of the business.

If this is true, it’s much better to come in as replacement CEO than to be a
founder. After four years and multiple rounds of financing much of the risk
has been mitigated. Additionally, no incoming CEO is working in their garage
and mortgaging their house.

~~~
repomies6999
Depends on the situation, if the company is u profitable and near bankcrupty I
think not many want to be the replacement ceo...

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PhantomGremlin
There is, of course, the FYIFV (Fuck You I'm Fully Vested)[1] trope that
originated at Microsoft. But I doubt that Gates and Allen were part of that.
:)

What I saw at one startup that went public is that the founders didn't start
out with a large amount of stock. But after the IPO the board (the founders'
buddies) would continue to award them substantial stock grants, even though
the company was doing just OK not great. That's not a scenario that's covered
by the article.

[1] [https://en.wikipedia.org/wiki/FYIFV](https://en.wikipedia.org/wiki/FYIFV)

~~~
DenisM
The FYIFV story seems pretty much made up:
[https://web.archive.org/web/20051228022236/http://www.kuro5h...](https://web.archive.org/web/20051228022236/http://www.kuro5hin.org/story/2001/7/16/13635/2730)

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cheerioty
Alternatively don't agree to vesting of founder shares and don't give away
more than 49%. Not saying it's easy, but also not impossible.

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arikr
> 2/ But that argument about how a new CEO should be compensated essentially
> puts on the table the question of whether the founder CEO is actually the
> best person to run the Company right now or if there is someone better
> suited to do that who could be recruited for a new market equity grant. It
> is often not in everyone’s best interests to have that conversation.

Why would it not be in everyone's best interests to have that conversation?

~~~
krallja
Pick at least one:

The CEO might not get to stay in their highly-compensated, prestigious
position that they presumably worked very hard for.

The board might have to answer questions about why they didn’t start looking
for a new CEO sooner.

The company might have to suffer through the trauma of switching CEOs.

All shareholders might lose some equity if a large grant is given to the new
CEO. (Nearly equivalently, the company will lose a large chunk of the shares
reserved for new hires, reducing its flexibility in hiring.)

~~~
Alex3917
> Nearly equivalently, the company will lose a large chunk of the shares
> reserved for new hires, reducing its flexibility in hiring.

Just create new stock. Problem solved.

~~~
wbl
Think of ownership as percents of a whole, not little pieces of paper. You
can't own more than 100% of the company collectively, and the more the CEO
owns the less other people will.

~~~
Alex3917
> Think of ownership as percents of a whole, not little pieces of paper.

Shares don’t represent a percentage of anything other than the current number
of issued shares. No one should be expected to work for free. New shares
should always be created whenever someone contributes labor, capital, or some
other asset. If existing shareholders aren’t being continuously diluted as
people make new contributions to the company then something is going seriously
wrong. Just because someone got shares for a previous contribution doesn't
mean you don't need to pay them for future contributions.

I mean would you expect your series A investors not to get any shares because
you already gave some shares to your seed investors? It makes literally no
sense.

Your options pool should be negotiated with your investors to cover your first
X (e.g. 100) employees. It makes no sense for it to cover founders, nor does
it make any sense for it to cover some indefinite amount of future labor.

~~~
marcus_holmes
Um, no... company shares represent a "share" of the company's value.

I think you need to understand what "dilution" means here.

Say your company has 100 shares, and is worth $1000, so each share is worth
$10. You create another 100 shares. Your company now has 200 shares. But the
company is still exactly the same company. It didn't just double in value,
it's still worth $1000, so now each share is worth only $5. Each share got
"diluted" in value.

If you, as a loyal employee of many years service, were holding 5 of these
shares, then the value of that loyal service just got halved. You would be
annoyed at this.

Company valuations need to go up in order to issue new shares without annoying
people. Seed investors buy shares when the company is small and not worth
much. When the Series A people come in, the company is much bigger and worth
much more. So the new shares can be issued without annoying the existing
investors because their net value remains the same (or usually goes up).

Randomly issuing new shares without an increase in company value will annoy
everyone, which is why companies don't just issue new shares whenever they
feel like it.

~~~
delinka
Creating shares, regardless of changes in company value, dilutes percentage
ownership of previous investors. I think your definition of "dilution" isn't
capturing this aspect of GP's comment.

~~~
mooreds
Sure, it dilutes the percentage owned. But unless you have a down round, you
have more value.

If someone has five shares at $1000 total valuation and 100 shares, they have
an equity position worth $50 and 5%. If the company grows and issues another
100 shares but the price paid by an investor for those shares is $5000, that
means that each share (ignoring preferred share premium, which is ok in the
abstract but shouldn't be ignored in reality) is worth $50. The five share
owner owns less of the company but what he or she owns is worth more ($250 vs
$50, but 2.5% vs 5%).

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iblaine
Of the founders I have met that are fully vest, most stick around. I presume
because they have a comfortable lifestyle or their shares will be worth more
by their direct participation in the company.

I firmly believe that true altruism does not exist and find it insulting when
I'm told otherwise. There's always a trade off.

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the_clarence
Why would a founder have to vest?

~~~
freddie_mercury
Many investment term sheets mandate it. If you don't want to vest then don't
take money from someone who says you have to vest.

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sheeshkebab
what bugs me about this is I don't know how founders don't feel like employees
from the moment they get themselves on vesting schedule...

[edited - removed my ranting]

~~~
keithwhor
It’s not about being babysat, it’s about downside protection for VCs. If
you’re competent and believe in your business (which any founder CEO should be
and do), your personal assessment of the risk of you leaving should be
effectively zero — meaning this term (“founders must adhere to this vesting
schedule”) reduces to, “sure, if that makes you happy, let’s negotiate on more
important things.”

Not agreeing to this term (or negotiating heavily) when accepting investment
capital can be a huge red flag for this reason. It immediately weeds out
people who aren’t committed to the business.

~~~
Phlarp
>It immediately weeds out people who aren’t committed to the business.

Wouldn't this be equally valid as "self selects for people willing to take a
worse deal" or even less charitably "self selects for suckers"

~~~
kenneth
I'm a VC, so let me shed some light on this.

The biggest reasons we require founders to be on a vesting schedule is not
really to protect our investments (as mentioned by another commenter). If the
founders were to decide to screw us over somehow, our investment is already
toast, and we potentially have other recourse.

It's to protect founders from each other. Most successful startups have
multiple founders, but the most common reasons for failure is also disputes
between multiple founders. Bad founder breakups are frequent. They can be
survived, but only with a vesting schedule for the founders, so that the
remainder founders aren't screwed by having to, in essence, work for the
founders who left.

If you have two founders, and one leaves after 2 years due to a disagreement —
without a vesting schedule, the remaining founder would have no motivation to
continue to create value, given all the value he creates goes in an equal
amount to the founder who left.

Even with a vesting schedule, in this case, we'll typically negotiate to
repurchase the majority of the stock of the departing founder.

~~~
Phlarp
So what explains the rote implementation of this logic on single founders too?

I expect to be heavily downvoted for even suggesting these things on this
board (as my original comment was) but this logic reeks of VC bullshit and I
suspect you won't refute that despite your assertion that this is totally only
about co-founder protection you wouldn't hesitate to impose such a vesting
schedule on a solo founder, likely using some of the other arguments in this
thread that you've even discounted in the original post.

~~~
kenneth
Perhaps the downvotes are because you call it "VC bullshit" — which is not a
very thoughtful or productive way to debate ideas.

Having it for solo founders makes sense in case another founder or executive
comes later, in which case a similar issue can arise. If you truly are a
single founder, there are very very few situations in case you'd leave
involuntarily, given there wouldn't be anyone with the power and voting stock
to fire you, and given your departure would likely mean the death of the
startup.

There's very little downside to accepting a vesting schedule as a solo
founder.

~~~
keithwhor
Kenneth — to defend the posters in this thread, I would wager that there’s a
nuance to term sheet / contract negotiation here that’s easy to be ignorant of
if you’ve never been in the situation. If you haven’t been through the ringer
re: fundraising, building a business it’s very easy to assume that (A) if a
company is successful then (B) I can define the terms, fuck all the rest. The
reality of most successfully funded startups is that there’s no one reality,
and it’s easy to understand that an HN reader might think; “vesting for
founders? That sounds like bullshit!” Without having gone through the logical
leaps of;

\- Is the opportunity real?

\- Can I build a product to start testing the hypothesis?

\- Can I recruit believers (customers, investors) to help test my hypothesis
and make it a reality?

\- Finally, do I believe there’s a hypergrowth opportunity, what are the risks
associated with pursuing that, and how do I minimize them without affecting
the size of the opportunity space?

Once you get to the latter step the largest risk early on is lack of access to
capital, and there are a _lot_ of ways to negotiate that materially affect
hypothetical “hypergrowth” potential (valuation / dilution, liquidation
preferences, you name it) which make founder vesting schedules borderline
irrelevant beyond aligning cofounder expectations and making sure people are
bought in. You see it in a term sheet and go, “okay, what’s this?” — forward
it to legal and get back, “standard terms, bigger fish to fry, move on.”

If you’ve never put the blood and sweat in to get to this point in negotiation
it’s probably easy to overemphasize the role a founder’s vesting schedule
plays early on.

~~~
Phlarp
Thank you for giving an answer with actual substance.

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rargulati
Sounds like a good problem to have.

