Vesting Founder's Shares

By Ross Finlay

Not all founders are created equal and that inequality needs to be reflected in the distribution of the founders’ equity pie.

Many are living with the consequences of having taken the “Three Musketeers” approach to share distribution. In most cases, founders stock is actually intended to compensate the founders for what they did do to launch the company; what they are doing now for the company and what they are going to contribute in the future. You may not have thought of it in that context, but let’s say you started your company with your best friend and you split the stock 50-50. After three months, your partner comes to you and says, “This is a lot harder than I thought. I’m going to get a regular job. Lots of luck! I wish you well.”

Your "partner" owns one-half of the company, and just walked out leaving you high and dry. How “fair” is that?

There are also problems of splitting the founders’ pie equally when not everyone is participating in the business full time. That may be “fair” for what has happened up to launching the company and the relative contributions of the people involved, but it often doesn’t take future contributions into consideration.

If one founder is working at the business full time 24/7, constantly concerned about the company’s fragile state, worried about paying bills and employees, sacrificing his family life, foregoing salary (or taking greatly reduced compensation), it will not be too long when this “fair” stuff begins to look a lot different.

The most frequently used method to address equitable division of the equity among founders, particularly if not addressed at the founding of the company, is to make the founders’ shares subject to buyback by the company – having your shares in the company vest over time.
A founder share buyback agreement is like vesting for stock options. Based upon some defined schedule and conditions, the company has the right to buyback some, or all, of your shares. Usually the buyback provisions will expire over time, meaning that as time passes the number of shares subject to buyback declines (and the number of shares you own outright increases).

For example the founders own 25% of their shares outright at the initial closing, with 75% being subject to buyback. After the first anniversary of the closing, the buyback will expire on a monthly basis on one/thirty-sixth of the remaining shares for the following three years (36 months). After four years, none of the shares will be subject to buyback.

Another alternative would be to have all of the Founders' shares held in escrow and be released to the Founders at agreed upon times - for example 25% per year for four years. Shares would be released at the end of each year.

Remember that Founder share buyback agreements should be considered when you are starting your business and “fairness” must be viewed in a broader context than the here and now.