Ask YC: Fair founding vesting

https://news.ycombinator.com/item?id=1038628

by ashishk • 17 years ago

6 2 17 years ago

news.ycombinator.com

I've been luckily enough to convince a good friend of mine to co-found a startup with me. He'll be joining an existing project, one that I've been working on alone for roughly 6 months. I've made decent progress (the site is live, generating revenue) so the equity split wont be 50/50. That said, we've found a balance we're both comfortable with.

My question is regarding vesting. In my last startup, both co-founders had an equal amount shares, so we both vested with an equal schedule (monthly over 4 years with a 1 yr cliff).

I'm not sure what would be fair in this position. I'm a strong believe in democratic voting (where your voting power is directly proportional to the number of shares), so I feel this may make things unfair in certain cases, specifically for my soon-to-be co-founder.

For example, if we both had a 1 yr cliff, I could technically fire him after 10 months. I couldn't imagine this would happen, but the fact that it could makes me wonder whether this is the usual way things go. Am I incorrect?

What would be a fair vesting schedule?

grellas• 17 years ago

The 1-year cliff is normal for employee situations where someone is hired cold and the company needs to evaluate performance before being at risk of that person becoming a shareholder.

This is not the case with founders, where the norm for co-founders (at least in Silicon Valley) is 4-year monthly pro rata vesting (i.e., shares vest at rate of 1/48th/mo). I think this is because someone normally does not normally take on a co-founder unless he is pretty comfortable with him and, thus, the 1-year evaluation period tends to be unnecessary (and potentially unfair, as you note).

Still, I have seen some founding teams try to use a cliff and, in that case, the only legal way to mitigate unfairness is to provide for acceleration of the unvested stock on termination without "cause" or on resignation for "good reason." This raises its own issues but is far preferable than trying to tinker with voting issues as an alternative way of avoiding unfairness.

On the other side of this, where you have already put in considerable work on the project and your co-founder hasn't, it is normal to do your grant in a way where the portion reflecting work already done is immediately vested, with only the balance of the shares being made subject to vesting (e.g., your grant might be 1/8th pre-vested with the remaining 7/8ths of the shares subject to, say, 4-year vesting).

All that said, there are ultimately no magic rules and these issues are all up for negotiation between co-founders.

I discuss various issues of this type here in an article entitled "What is restricted stock and how is it used in my startup?": http://grellas.com/faq_business_startup_006.html.

ashishk• 17 years ago

Wow thanks! That was super helpful. I will check out your blog as well.