Comments on: Why Your Startup's Founders Stock Should Vest Over Time

By: Victor Levenson

Victor Levenson — Wed, 17 Feb 2010 14:35:15 +0000

Thanks Ryan – very informative!

I started a C corp based on my IP (licensed from U); my main guy comes in as a CTO; no salaries, part-time jobs; all the money – from my personal account. I am structuring it as founders common stock (granted) and common stock (purchased). Another faculty wants to come in (no experience, contacts, future participation in activity) – should he be granted founders common? Or allowed to purchase common? At this stage – w/o company docs, by-laws, etc – he is taking a greater risk than future investors; should he be granted founders shares and standing? I realize there are no obvious rules, but what’s the practice? Is he a founder or an early investor?

Thanks much!

By: Ryan Roberts

Ryan Roberts — Wed, 06 Jan 2010 21:31:20 +0000

Joseph – yes, the whole share allotment is subject to dilution.

By: Joseph Shavit

Joseph Shavit — Wed, 09 Dec 2009 17:16:35 +0000

Great article Ryan.

Question: Am I correct in the following assumption?

1. If the founders are all on a vesting schedule then their whole share allotment (vested and non vested) is subject to dillution as new investors come on board?

Thanks!

By: Laura Terious

Laura Terious — Tue, 02 Jun 2009 20:07:28 +0000

Dear Ryan,
I started a business in march of 2007 with a Friend of mine while PhD students – we have it incorporated as an LLC. As we were both scientists, we brought in a MBA student as our CEO, with the same timeline that we had to finish. Now that we are finishing our PhD, but I tried to negotiate staying here because of the company, but as my scholarship was from my home-country, they didn’t accepted my offer and I’ll be forced to come back now after the completion of my PhD. During this 2 years we had secured a state grant, and have a posdoc working in our prototype with great progress. We had also developed other patents (3-4) in addition to the one we filed and licensed from our university, which will be filed as soon as we secure VC investment – we are in due diligence right now.
As I will have to leave, we are looking for reasonable figures for the equity split that would not hurt the company. I’ll continue as a scientific advisor. Our timeline for commercialization and a possible acquisition/exit is in 18-30 months from now.
Me and the other PhD started with half of the shares, and the MBA is vesting 10% over 5 years.
Sorry for the huge question, with a lot of variables but any insight or reference where I could look for would be really appreciated.
Thanks.

By: Ryan Roberts

Ryan Roberts — Thu, 16 Apr 2009 15:44:30 +0000

Ted,

1. Vesting schedule should do that.

2. Up to you, but it’s probably easier just to grant them more stock or options if they come on FT.

By: Ted

Ted — Wed, 15 Apr 2009 04:26:20 +0000

Great post. What happens when the team is a bunch of students? I had a business idea late 2008 and came to campus in 2009 looking to build a team to build the business. 4 months and a working prototype later two of us are doing it full time, while the other three will be doing it part time. The other three are brilliant, so I really want them to be on board, but there is the risk that they aren’t able to contribute because of school.

Therefore, I guess I have two questions:

1. I promised 3 of the initial team members stock (totaling less than 20%) to get this business running. They have definitely earned this. Is there anything I should/ can do to keep them involved/ protect the company before handing this over?

2. How should stock be issued from here in for the 3 part time contributors? Have one vesting schedule for part time involvement, with the option to switch to a different vesting schedule if they come on full time?

Thanks,

Ted

By: Ryan Roberts

Ryan Roberts — Tue, 14 Apr 2009 13:38:05 +0000

You can issue stock at different times, but I don’t suggest doing so if everyone is “on board” at the same time. But if it’s just you at the beginning, then yes, issue stock to yourself and then to your co-founders as they come on board. As for par value, it should be the same for the common stock. The issue price may be different, however.

By: Jo

Jo — Thu, 09 Apr 2009 21:24:10 +0000

Your post is very informative. I have a question similar to Richard’s. Can I issue shares to myself only when I incorporate, and later issue founder’s stocks with par values of 0.1 to 0.00001 to my co-founders?

Thanks,
Jo

By: Ryan Roberts

Ryan Roberts — Sun, 29 Mar 2009 21:26:10 +0000

1. Really up to you. Think about team cohesiveness, also. Any VC will want to see the whole team with the vesting schedule.

2. Issue to those who will be part of the team.

3. No, in this article I was just talking about founders’ common stock vesting over a period of time. Not options to employees.

By: Richard

Richard — Wed, 25 Mar 2009 03:49:20 +0000

Hi Ryan,

Great post, thanks for all this valuable info. I’m starting a company and have a few questions of clarification.

1. I am the original founder (my business idea) and am bringing on a partner/co-founder to help me start this business. Should the vesting schedule apply to both myself and my co-founder, or just to my co-founder?

2. Should I incorporate and issue all shares to myself initially, and then give shares to my co-founder (vested or otherwise), or just set it up according to the equity split right off the bat. (but then the vesting becomes moot I would guess??)

3. When you refer to stock vesting, this is a separate pool than the options that will be given to employees, correct?

Thanks,

Richard

By: Jim

Jim — Wed, 11 Mar 2009 18:41:04 +0000

Thanks for the very informative blog! As a startup trying to undestand how to set up a business and finding it somewhat frustrating understanding all of the variables, especially on the financial side, you are good at explaining the details in layman’s terms.

By: Ryan Roberts

Ryan Roberts — Fri, 06 Feb 2009 18:55:12 +0000

You could either skip the cliff or reduce the term from say 4 to 3 years (and still keep the cliff). I’d probably recommend keeping the one year cliff to keep the founders “hungry.”

As for the sweat equity/cliff issue, there’s a few considerations. As you mentioned, this person’s only compensation is the equity. But if he or she is not receiving cash compensation, presumably this person is working somewhere else for cash compensation and thus NOT fully involved with your startup. Therefore, he or she would be vesting the entire first year while working somewhere else.

By: Ben

Ben — Fri, 06 Feb 2009 16:45:42 +0000

Great article and a very important principle to keep in mind. Quick question, what if both startup founders have been working for a year before actually incorporating? Would you recommend changing the 1-year cliff or maintaining the same schedule? Also would the vesting schedule change at all if some one joins for pure sweat equity? A 1-year cliff may seem unfair for someone who isn’t getting compensated at all.