Let's Talk about Vesting

What is vesting?

Ok. Let’s talk about vesting. Every sophisticated startup subjects the shares it issues to vesting. This is a situation in which you and your other founders receive all your shares upfront - or, if you are in an LLC, your units. This means you can vote the shares/units and manage the company as you need.

However, for a period of time, the company has a right to repurchase these shares/units for $1. Over time, this right to repurchase diminishes. After 3 months the company can only repurchase 90% of the shares, after 6 months 80%, etc.

 After three years (which is the amount of time we recommend for founders) all the shares/units have vested and the holder owns them fully and outright.

Why do we do this?

So why do we do this? Look, sometimes things don’t work out, for good reasons and for bad. You start a company with a great co-founder, and then the cofounder gets an amazing job offer from Google, or runs off to become a surf instructor in Bali, or you realize after a while that you’re not a good fit.

 One of the founders leaves, and the other founder or founders are left holding the ball. What’s worse, you have to find a new co-founder. But what are you going to if you don’t have any shares to offer the new cofounder because the old cofounder left with them? This is where the repurchase right comes in. The Company can claw back the shares that haven’t vested and can offer them to someone new to carry the torch. Vesting protects co-founders from both good and bad situations. 

What is the standard vesting schedule that you recommend?

We recommend a three year vesting schedule for all founders with a six month cliff. This means that no stock vests for 6 months, at which point 1/6th of your shares vest. After that, the shares vest monthly for the next 24 months until everything is vested. We think this is enough. When you receive your first major round of investment any sophisticated investor will require that the founders re-start their vesting, so this should be more than enough to get you there.

What is a cliff?

 Basically, none of your shares/units vest for the first 6 months. We think this is fair, because it takes about six months to get everything started and to make sure all the founders are committed to the project. After six months, you get all six months of vesting at once. If someone leaves before the first six months, they don’t leave with any shares/units. This saves you from losing shares/units to someone who’s not really up to the task!

I heard 4 years is standard? Why 3 years?

We think this is enough. When you receive your first major round of investment any sophisticated investor can require that the founders re-start their vesting, so this should be more than enough to get you there.