Ask YC: How do you define "leaving" for vesting purposes?
I've heard several times that it is good for founders to be on a vesting schedule so that nobody leaves prematurely and makes a profit out of the other's work. However, since the founders usually serve as board of directors members, officers and shareholders in the company and are not necessarily employees it seems to be difficult to define "leaving". How do people do this usually?
3 comments
One way to do it is make founders firable "at will" instead of "for cause", so if one founder is acting up the others can kick him out to satisfy any defintion of "leaving" and that's that. The downside is that co-founders can conspire agianst you and kick you out for no good reason. So you have to weight probability of one founder dragging his feet vs. several founders conspiring against an innocent.
On the third side, eventually you will get investors and they may choose to fire you "at will" if your agreement allows that.
Confused yet? Now go talk to your lawyer - he should have experience.
Confused yet? Now go talk to your lawyer - he should have experience.
make founders firable "at will" instead of "for cause", so if one founder is acting up the others can kick him out to satisfy any defintion of "leaving" and that's that
Note - this is _highly_ dangerous in the presence of outside investors such as hard-nosed VCs. Unvested options cause reverse dilution, meaning there is an active financial incentive to your investors to kick out a founder with a lot of stock if they think they can get by without you. Venture Hacks generally recommends accelerated vesting on termination, for this reason - check out http://venturehacks.com/term-sheet-hacks#vesting
Note - this is _highly_ dangerous in the presence of outside investors such as hard-nosed VCs. Unvested options cause reverse dilution, meaning there is an active financial incentive to your investors to kick out a founder with a lot of stock if they think they can get by without you. Venture Hacks generally recommends accelerated vesting on termination, for this reason - check out http://venturehacks.com/term-sheet-hacks#vesting
have vesting, definately - along with a cliff that means people have to stick around long enough to produce something of value before they get to "take home" any equity at all.
if you're just starting out, and pre-outside investment, my advice is don't worry too much or waste time/money on legal fees - concentrate on your core product/service and leave the legals until you agree to take on funding.
suggest all you need is a simple agreement between the founders that deals with:
1. the (fairly high) chance that people may leave (for whatever reason) and new people may join before you reach the next stage, and
2. what equity split the founders get (suggest equal unless there's a major difference in input e.g. one person full time, others weekends..), a common understanding of what's required to maintain this (i.e. effort/results required) and a simple procedure for what will happen if people's input doesn't match this (basically make sure everyone accepts that they don't get automatic entitlement to their share up-front - they have to work for it, and if they don't pull their weight then the others are entitled to ask for a review of the split)
if you have a situation where some co-founders are "conspiring" against another, there's going to be little point in that founder trying to stick around - something underlying will be seriously wrong and the startup's chances of success will be majorly scuppered - so i think thats a risk everyone has to take - it's down to each individual member to make themselves crucial, and if your co-founders turn out to be s then take your vested shares to date and move on quick.
of course change everything soon as (or just before) outside investment - raise enough to cater for paying your lawyer to sort this when finalising the deal!
if you're just starting out, and pre-outside investment, my advice is don't worry too much or waste time/money on legal fees - concentrate on your core product/service and leave the legals until you agree to take on funding.
suggest all you need is a simple agreement between the founders that deals with:
1. the (fairly high) chance that people may leave (for whatever reason) and new people may join before you reach the next stage, and
2. what equity split the founders get (suggest equal unless there's a major difference in input e.g. one person full time, others weekends..), a common understanding of what's required to maintain this (i.e. effort/results required) and a simple procedure for what will happen if people's input doesn't match this (basically make sure everyone accepts that they don't get automatic entitlement to their share up-front - they have to work for it, and if they don't pull their weight then the others are entitled to ask for a review of the split)
if you have a situation where some co-founders are "conspiring" against another, there's going to be little point in that founder trying to stick around - something underlying will be seriously wrong and the startup's chances of success will be majorly scuppered - so i think thats a risk everyone has to take - it's down to each individual member to make themselves crucial, and if your co-founders turn out to be s then take your vested shares to date and move on quick.
of course change everything soon as (or just before) outside investment - raise enough to cater for paying your lawyer to sort this when finalising the deal!
Wow - talk about an optimistic approach to business. I have to say that IMO this is horrible advice. You need a lawyer for equity deals - you'll never convince me otherwise. Your "simple agreement" is fine - as long as it was written/reviewed by an atty w/ experience in this particular subject. Having a partner, dissolving a partnership, firing a partner - those are rarely simple "plug and play from a handbook" type of situations. You need a document that handles everything known to man. The more you spend up front on this one not-simple matter means you spend less down the road.
"If you can't afford to do it right, don't do it at all." You'll potentially save yourself a ton of money and stress if you follow that sentence. Don't start your business if you can't do the legal/tax stuff correctly. Don't go into a partnership if you can't do the legal/tax stuff correctly. Any other advice IMO is just overly optimistic. "But it'll never happen to me and my best mate, Jimmy - we'll be buddies for life!" Of course you will...
"If you can't afford to do it right, don't do it at all." You'll potentially save yourself a ton of money and stress if you follow that sentence. Don't start your business if you can't do the legal/tax stuff correctly. Don't go into a partnership if you can't do the legal/tax stuff correctly. Any other advice IMO is just overly optimistic. "But it'll never happen to me and my best mate, Jimmy - we'll be buddies for life!" Of course you will...
i disagree with the sentiment here - specifically "If you can't afford to do it right, don't do it at all." which i've understood to mean "if you can't afford to pay a lawyer [on day one], don't start a company".
to clarify, by "pre external funding" I essentially meant "pre money" - so situations where you're not bootstrapping yourself to the tune of several tens of thousands - e.g. pre-YC, idea-stage companies - when you're just getting started.
example: say if you have between zero - 10k to spend, don't spend it on legal - there's bigger risks/more important things!
i agree you need a lawyer for a proper equity deal - share classes, tax, voter rights.. yuk! but you don't need all that on day one - just an agreement that "if we get to the next stage, we'll be equal partners assuming you do X and I do Y".. ok, and a bit more than that, as i said previously.
i've been through all this, and regret worrying too much about legal/shareholder details in the beginning. sure, we had team issues, guys coming and going, and guess what - they $2k and countless hours we spent on legal did't help at all - and in the end our first shareholder agreement was ripped up the moment we raised angel.
finally, i think anyone starting a start-up has to be optimistic! but optimistic doesn't mean not believing the worst will ever happen to you - i specifically said there's a high chance your team won't survive in it's original form.
[edit: screwed up double-negative in final para..]
to clarify, by "pre external funding" I essentially meant "pre money" - so situations where you're not bootstrapping yourself to the tune of several tens of thousands - e.g. pre-YC, idea-stage companies - when you're just getting started.
example: say if you have between zero - 10k to spend, don't spend it on legal - there's bigger risks/more important things!
i agree you need a lawyer for a proper equity deal - share classes, tax, voter rights.. yuk! but you don't need all that on day one - just an agreement that "if we get to the next stage, we'll be equal partners assuming you do X and I do Y".. ok, and a bit more than that, as i said previously.
i've been through all this, and regret worrying too much about legal/shareholder details in the beginning. sure, we had team issues, guys coming and going, and guess what - they $2k and countless hours we spent on legal did't help at all - and in the end our first shareholder agreement was ripped up the moment we raised angel.
finally, i think anyone starting a start-up has to be optimistic! but optimistic doesn't mean not believing the worst will ever happen to you - i specifically said there's a high chance your team won't survive in it's original form.
[edit: screwed up double-negative in final para..]
Why would your startup have directors that weren't employees? You aren't Alcoa.
From our experience with the lawyers, the "leaving" in vesting refers to employees of the company, which is all you should have.
From our experience with the lawyers, the "leaving" in vesting refers to employees of the company, which is all you should have.
Shotgun clause, anyone?