Ask the attorney: Founder vesting - 4 Jan 2010

Ask the attorney: Founder vesting

(Editor’s
note: “Ask the Attorney” is a new VentureBeat feature allowing start-up
owners to get answers to their legal questions. Submit yours in the
comments below and look for answers in the coming weeks. Author Scott
Edward Walker is the founder and CEO of Walker Corporate Law Group,
PLLC, a boutique corporate law firm specializing in the representation
of entrepreneurs.)

Question: 
My two friends and I are launching a new venture, and we have agreed to
split the stock ownership equally.  The problem is that I’m not sure
how committed they both are.  What happens if one of them leaves in a
few months?  Does he still get to keep all of his stock?

Answer: That’s
a good question – and a common issue among founders.  I strongly
suggest that you create what’s called a “vesting schedule” upon the
company’s incorporation, which would require stock ownership to vest
over time.  It’s customary to impose reasonable vesting restrictions on
founders’ stock because it has generally been issued not only for the
founders’ services and/or property (e.g., software) relating to the
conception of the venture, but also for their continuing commitment and
efforts.

As your question implies, it would be inherently unfair for one of
the founders to quit the venture after a few months (or weeks), but
still be permitted to keep all of his or her stock.

The most common founder schedule vests an equal percentage of stock
(25 percent) every year for four years on a monthly basis.  Sometimes,
however, it may be appropriate to impose a one-year “cliff” (i.e., the
founders would not get their first 25 percent unless they have remained
with the company for 12 months) – particularly where the founders don’t
know each other or don’t have a history of working together.

Another possibility is to vest a portion of the stock “up front”
(i.e., one or more founders would receive a certain percentage
immediately) – usually as a result of their contributions to the
venture prior to the issuance of the stock or date of incorporation. 
Vesting restrictions are addressed in a restricted stock purchase
agreement, which each founder would be required to sign and which would
grant the company the right to repurchase any unvested shares (at the
initial purchase price) at the time of the founder’s departure.

In addition, investors in connection with the first professional
(“Series A”) round of financing will usually require a vesting
schedule.  Accordingly, it would be prudent for the founders to impose
a reasonable one of these upon incorporation for a second reason: If a
reasonable schedule has already been established prior to negotiations
with the investors, it’s more likely the investors will simply keep it
in place.

If the founders haven’t established a vesting schedule or a large
percentage of the founders’ stock has already vested (due to either the
lapse of time or the unreasonableness more...