Vesting Hacks: Part I

This is the first in a series of Venture Hacks articles on how to get the most out of your founder’s equity.

“By the time we did the financing we had been working on [the company for] 2 years, but they only vested us a year. So, they got a year of free vesting from us.”

Joe Kraus, Founders at Work

Summary: Don’t agree to vest all of your shares just because it is supposedly “standard”. Get vested for time served building the business.

Your Series A investors will ask you to give all your founder’s shares back to the company and earn your shares back over four years. This is called vesting — see Brad Feld’s article on vesting if you need a primer.

Vesting is a good idea:

You are critical to the company and you have told your investors that you are committed to the business. They are simply asking you to put your shares where your mouth is: a vesting schedule demonstrates your commitment to the company.

Vesting also ensures that a co-founder who leaves the company early doesn’t receive the same amount of equity as co-founders who stay in the business.

Get vested for time served building the business.

But don’t agree to vest all of your shares just because it is supposedly “standard”.

If you have been working on the company full-time for one year, 25% of your shares should be vested up-front and the balance of your shares should vest over three to four years. The best vesting agreement we have seen for a founder in a Series A is 25% of shares vested up-front with the balance vesting over three years.

You should argue that,

“New employees who join the company today will earn all their shares over four years. Employees who are already here should be credited for their time served.”

We don’t recommend trying to escape a four-year commitment to the company (including time served). Four years is the typical commitment for a start up, high school, or college, as well as the span between Olympics and World Cups, and the term we give our Presidents to start as many wars as possible.

Consider cliffs for newfound co-founders.

One-year cliffs are typical for employees but currently rare for founders.

Nevertheless, consider negotiating one-year cliffs with newfound co-founders whom you haven’t worked with in the past. If a co-founder leaves the company after three months, you don’t want him walking out the door with a large chunk of the company.

Note: See the rest of the venture hacks. Thanks go to Mark Fletcher for reviewing this hack. This is not legal advice.