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

3 points by hajiss ↗ HN
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.

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?

7 comments

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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.

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?
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.

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.

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-...

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.

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.