What is vesting?

Ok. Let’s talk about vesting. Most multiple-member LLC’s subject the Units they issue to vesting. This is a situation in which you and your other founders receive all your Units  upfront. This means you can vote the Units and manage the company as you need.

However, for a period of time, the company has a right to repurchase these Units for $1. Over time, this right to repurchase diminishes. After 3 months the company can only repurchase 90% of the Units, after 6 months 80%, etc. After three years (which is the amount of time we recommend for founders) all the Units have vested and the holder owns them fully and outright.

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 Units 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 Units 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.