Vesting — Critical to Multi-Founder Startups

Founders in multi-founder startups often are (or at least should be) concerned about ensuring that their fellow co-founders are committed to the startup and will work toward the goals assigned to them. Many startups run into issues with “dead equity” — a founder leaves the company at an early stage with a significant chunk of the equity of the company, then deadlocks over management or strategic decisions occur among the remaining founders and the departed founder’s equity is needed to break the tie under the company’s organizational documents. These concerns are also often shared by the startup’s investors, who obviously don’t want founders departing a company in which the investor has contributed significant sums of money. As a result, most founders take “restricted” equity subject to a vesting schedule. Under this structure, the equity is considered restricted because the company holds an option to repurchase the equity from the founder at the purchase price; when the equity “vests”, it is released from this option and no longer subject to repurchase by the company. However, aside from the company’s right of repurchase, the founder exercises all rights and responsibilities attendant to ownership of the equity, such as, depending on the terms of the company’s organizational documents, the right to vote or right to distributions of company profits. Vesting schedules can take whatever form necessary to address any particular founder concern — if co-founders are concerned about their partners leaving the company early, a vesting schedule may be lock-step with time spent with the company, or vesting may be set according to certain business milestones that a particular founder is expected to achieve.

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