Are you all set on issuing shares among the founders, but not sure on the best plan for this? If so, it may be time to implement a vesting schedule on your founder’s stock to start off on the right footing. Read on to learn about founder vesting.
What is Founder Vesting?
Founder vesting is when the founders agree that their initial stock would vest over a period of time, usually from 4 to 6 years, after which they would receive the stock. The main idea behind vesting is that if a founder leaves in between, then it is not fair for the other founders.
In case there isn’t a vesting schedule implemented, a founder can easily be the owner of the company without putting any effort to make the company grow. They could then sell their share of the company if they decide to leave early on. With vesting, a founder that leaves would not own any part of the company at the start. This is the main reason why many investors suggest that founders should have a vesting schedule added to their stock when issued.
It is also common for founders to have accelerated vesting on their founder’s stock in the event of the sale of the company. They would then receive a large part or all of their remaining shares before the new management comes in.
How does Founder Vesting work?
Usually when a founder or employee gets some kind of compensation under a vesting schedule, the person would have to stay with the company for a longer period of time (the vesting period) before they can get the shares for their work.
For instance, a founder of the company is offered with 1 million shares that are subjected to vesting at the value of $0.001 at the time the shares are granted. This means that the worth of the shares as per its value is $0.001 x number of shares = $1,000.
The shares would represent 10% ownership (10 million shares outstanding) for the founder in the company and will be vested over 5 years. This means that the founder would get 200,000 shares every year for a period of five years. At the end of the 5 years, the founder would have all the shares offered to them initially with the vesting period is complete. Now, the owner can sell off the shares, transfer them or keep them and stay with the company.
Why Consider Vesting Schedule for Founders Stock?
One of the main characteristics of founders’ stock is that it comes with a vesting schedule. It would let us know the right time when a founder can exercise their stock.
A vesting schedule is adopted so that founders in the company do not experience a “free-rider” situation. This means that in case a founder decides to leave half-way before the company grows, it is unfair for the other founders to keep working while the ex-founder took their ownership. So with a vesting schedule, when a founder leaves before time, they would not be entitled to the stock as they would have left before the stock became fully vested. There is also milestone vesting, which requires shareholders to achieve certain goals before they are granted stock, such as sales quotas or project milestones.
Even though vesting may not occur in every company, it is always good to play safe and keep a vesting schedule for the founder’s stock. Another reason for having this is if you are expecting funding in the future, investors would ask about any share vesting plans in the company, and how the company expects to retain it’s staff.
Additionally, the founders putting money into the firm may also come up with a better proposal on dividing the equity to give them a better allocation compared to the work of the founders.
Why do Investors Prefer Vesting Schedules?
As mentioned above, investors like it when founders have a vesting schedule on their granted founder’s stock. The reason behind this is that investors feel that the key to a successful company is not just what the company is offering, but also the team behind it.
After all, we have all heard of stories about businesses that suffered when key employees leave the company. So investors look for vesting schedules to be added as a safeguard to staff turnover. In short, vesting schedules offer investors with comfort that the founders will stay with the company or be forced to sell back the shares in case they leave early.
All in all, putting a vesting schedule on the founder’s stock is very important if you are planning to grow your company. Also, do not forget to have a founder’s agreement when you are splitting up the equity amongst the founders. Not sure what a founder’s agreement is all about? Check out the next knowledge-base article to learn more or visit the main menu here!