It's a frustrating and uncertain place to be as a founder.
You're being paid peanuts compared to what you could be making in the industry (generally your comp is garbage until maybe Series C) and your equity is already as good as it's ever going to get, so some reasons to stay behind are:
1. you're really enjoying the gig
2. you think that by you staying behind, the overall worth of your equity will be higher than by having someone else take over
3. you think that quitting at that stage will be a permanent black mark on your record, the captain abandoned the ship
4. you're totally out of money after years of trying to make ends meet with a startup founder gig, so you can't start a new company without spending a year or two working for someone else first
There's real opportunity cost to sticking around. You could be starting a new business and begin another 4 year vesting countdown there. Maybe you're ok working for someone else, you could be at Google collecting a 1/2M paycheck, feeling like you're on vacation compared to a growth stage CEO job. Maybe you just want to take a breather and actually have time for your spouse and kids for a little bit, before another dive.
I'm in a similar tough spot, I'm the technical founder and am about to leave the company for health reasons. The difference between my case and what's described here, is that my salary isn't too bad (for Dutch standards) and that the investors are best described as angel investors.
The fact that they are angels makes everything more personal though. And with the current market, getting someone with my set of skills to replace me at a decent rate is going to be near impossible. It's a really tough spot, but in the end mental health is most important.
Keep in mind some founders have had careers before starting a company (average age of YC founders is like early 30s?) so they might have 10 years experience leading teams + some significant victories that came from their startup.
If someone fresh out of college just worked 5 years on their startup and then abandoned ship they probably wouldn't get a very impressive role unless their startup was a crazy fast success though.
If you interview well and have competing offers from large firms that shell out good cash, you can get that as a senior dev. Networking helps a lot, if you have the right friends working there, they'll make sure you interview with the right people.
1-2M is way above market for a "senior dev." Even for the top companies, that tier is reserved for truly outstanding performers who have launched major projects/innovations.
Yeah he said 500k. I Initially thought the same as you, 1-2mil.
500k for a senior dev is actually not too far out there. I have an L3 friend at Google (l3 is new hire level) who has been at the company for almost 2 years and who's total comp is almost 300k. So some L5s and L6s could certainly be pulling in 500k.
That link doesn't support the claim of "1/2M paycheck". L7, the first point at which there's a reported total comp over $1M, is a fairly senior position at Google. If you can walk in at L7, it probably means you've already "made it" somewhere else.
This piece seems to assume that founders of a company are just some kind of super-employee of the VC that are only going to be around so long as they are getting regular compensation.
That isn't how it's supposed to work. The founder has to believe they create the value. They don't work to get grants of stock, they work to increase the value of the stock. They created all the stock in the first place!
If they think that they could just hire someone else to do their job and everything would just turn out the same then what the hell did they even found the company for in the first place?
The way VC is set up in the valley has warped peoples understanding of what a business even is.
To be fair, Fred Wilson is not saying that these grants of new stock are appropriate everywhere -- he specifically said he has never seen it happen when a founder-CEO owned 25% or more of the company and that the cutoff is somewhere around "double digits".
If a founder-CEO only controls about 8 or 9% of the company stock then perhaps they ARE just a kind of super-employee of the VCs.
It doesn't really, unless the founder has signed a stockholder's agreement with other founders or investors specifying a vesting period. Under normal circumstances a founder or founders form a corp, put some cash/equity in, sign a stockholders agreement specifying who owns how much, and from that moment the equity is wholly owned by the signatories to that agreement. Other agreements may come into play as the company seeks additional investment, etc., but I can tell you that at least 20 years ago when I did a startup + angel round + series A + B nobody at any time suggested that the equity I'd worked for the first four years should somehow be clawed back and then vested, and the conversation would not have gone well if they had.
Founders outright own the company in the period between creating the C Corp through taking safes, if any, until taking a priced round.
Depending on the progress at that point, you may or may not get asked to revest. In our case, we negotiated with our VC that our vesting period started on incorporation. However, we were funded within 6 months of incorporation. If that period were to be years, it would be extremely reasonable for a VC to demand revesting, and to the benefit of multiple founders IMO.
No. All operator equity vests. Any potential partner who demands unvested equity is one you should avoid. Vesting protects cofounders as much as it protects money investors.
I've co-founded four companies with seven distinct co-founders, raised angel and venture funding, and had two very successful exits. I've never had vesting for any founder at any stage, and never had cause to wish for it in hindsight.
There are advantages and disadvantages to founder vesting and they are situational. Recommending it as a default may very well be good zeroth order advice for beginners, but your position is way too strong.
A start on thinking about why it might not always be the best way to keep a team together is to look up the "israeli day care study".
Here, I’ll be the first to provide a perspective from the other “other” side of this argument. I am a founder who once had a vesting schedule with a cliff (one year). I built the first version of a venture backed company as the CTO, we had backing from investors you’ve heard of.
The product went live and was even used by some people. Eventually I ended up in a place where it was clear to me I disagreed with the direction of the business and the CEO leading it. I for one am glad there was a cliff.
Because I left and when I did my co-founders continued to work on that business. As far as I know they’re still at it.
That was over six years ago. The code I wrote is likely of VERY little value in the grand scheme of things.
The value I added in thoughts, ideas, advice etc. is probably about as valuable as people my co-founders have had several dinners with over the years at this point. If I had walked away with 1/3 of the equity that would have put the other two co-founders in a horrible situation and would have been completely unfair of me to do.
The cliff did its job. You vest to protect all parties and because it’s just the right thing to do. Take it from someone who walked off the “cliff”.
I’ve started multiple companies since then. Each has had a vesting schedule and a cliff for all founders.
Writing the MVP for that company's app was invaluable at the time. Without a working app, your cofounders would not own their company.
Leaving a startup is a personal decision that can be very rational; I don't criticize your decision to leave. I am critical of your understating your importance to the business. I think that 1/3 of the company would have been far too much, but 0% seems far too low.
Further, lots of people don't seem to understand the job changes.
Take cto. When it's founders and maybe an employee, cto is a full-time dev.
Then you get funded, and four months later the engineering team is 4-6 people. The cto is now a line-level manager who codes a bit. It's a completely different job.
Then you get the next round, and suddenly the cto supervises 2-4 line level eng managers and has to decide if (s)he wants to be cto or dir-eng, because those roles are about or have already split. This, also, is a completely different job.
At each step, it's a completely different job.
Your company needs to be prepared for founders who don't want, can't, or aren't good enough at the next step that is required of them. Because the job literally completely changes every 2 years. Or sooner.
I think you got lucky. That's great, and I'm happy for you. We could bicker about the odds. Maybe it's 60/40 in favor of you getting away without vesting? Maybe even 70/30? The first company I ever worked for, which also had a successful exit, didn't do vesting. It never occurred to any of us to be ruthless about it, and it happened that nobody left early anyways: they had gotten the team exactly right. Vesting wouldn't have made a difference. Maybe that's you, too?
Me, I've been working for small companies ("startups") since 1995. I've been on the founding teams of 5 of them. In all but 1 of them, key members of the team left at some point. In each of those situations, lack of vesting would have meant they left with a full share of the company, leaving everyone else on the team to work --- possibly for years --- for that person's equity. In one case, that's exactly what happened, only we didn't know it until the end.
That's a mistake I will never make again.
These are, I think, the very worst kinds of mistakes startup founders can make. The kind that don't really impact the company on a day-to-day basis and that you won't notice, until you're actually successful and finally at or near accounting for that success, and you realize you did something stupid that tolls the whole fucking enterprise. You might not be able to do anything to mitigate, you can't even bail from the company and do something different, you're never getting the time back, the damage is done. Vesting isn't the only mistake like this, and it's not the worst, but it's bad.
And for what? Does it somehow make you feel better not to vest? I don't get it.
(I don't pretend to understand Alex's logic about vesting as a solo founder but did not think hard about it either).
Obviously, yes, if you keep going back to the well, eventually someone will betray you. And vesting will make a founder breakup easier (if the company can survive without the founder, and if it hasn't already been long enough that they are fully vested, and if you couldn't have come to a negotiated agreement). And that's a good reason to do it. Another good reason is if your cofounders are already pretty mercenary and the vesting incentive actually makes a breakup less likely.
There are good reasons not to do it too. If you work with good and honorable people, who have kept their promises to other people in their life, and who have (incredibly valuable) reputations as honest people to protect, they are pretty likely to keep their promises to you too. (Don't forget to actually discuss these promises!) Unless you unnecessarily move the decision to leave into the category of "rational economic decision" by putting a price on it. (And four years later, when that price has decreased to zero?)
Another reason is that you might trust your cofounders more than your possible future investors (they have reputational incentives too, but you don't know them yet!), and prefer not to give the latter a possible avenue to steal the company from some or all of you.
Sometimes there can be tax tradeoffs, depending on what else you are doing.
As I said, it might be a good choice to have vesting in many or even most circumstances. Everyone should carefully consider it. But "always no matter what" is not good advice.
"Good and honorable" has nothing at all to do with it. When you run a company without vesting, you are explicitly telling the founders they have an unencumbered right to their share of the company practically without regard to when they leave. When they come back, 10 years later, what you have isn't a "betrayal", but rather a mutually-motivated disagreement, and one in which one side has a great deal of legal leverage. It's a nightmare scenario that has nothing to do with moral judgements, and exactly the scenario vesting is designed to eliminate.
The idea of starting a company that is predicated on not surviving a founder departure is weird to me.
If you think that what the corporate documents say is the only or most important possible form of commitment between founders, we probably have very different philosophies about business and probably life.
To give a related example, I've sold a company to an acquirer for whom the deal was extremely material, and for whom I was a very key employee, who tied me down for two years with nothing more or less than a promise and a handshake. They were smart: I was far less likely to leave during that time than I was after another acquisition where I had big golden handcuffs.
(Also, I have trouble understanding the "10 years later" scenario. Is the assumption that there's a founder breakup and... everyone just forgets about it and goes about their business? THAT sounds nuts.)
I didn't say anything of the sort. In fact, I said the opposite: I specifically imputed good faith to both sides and called it a disagreement. The departed principal believes their work to have been instrumental; the remaining team believes otherwise. Without vesting, the lone departed can kill the deal.
The "10 years later" example was not made up. Like I said, I've been a party to a "didn't think we needed vesting" scenario, and it's a mistake I won't make again.
I 100% believe you successfully managed a company that was built on handshakes. Like I said, you got lucky (if you'd prefer the alternate framing, say instead "we didn't get unlucky"). I have trouble understanding why you'd leave something like this up to chance; companies are (in most cases) many years worth of dedicated enterprise from multiple people, and deserve a few hours of de-risking by spelling the arrangement amongst principles out in writing.
I'm hardly alone in the belief that founders should vest; you yourself called it a "default"; I quoted Spolsky on it below; and it is, all else aside, certainly a norm in the US. I'm still waiting to hear why you wouldn't do this. Because it helps investors "steal the company" from you? If you raise VC, this debate is especially irrelevant, because while I believe you took funding for one or both of the companies you sold (as I believe all the experiences you relate), I do not believe you could today raise a round from an actual VC firm without taking on a vesting schedule.
I might not have time to continue this discussion.
Try this:
If standard vesting terms make you nearly indifferent to your co founder leaving, or to being fired, then they are perfect for you and you should definitely go for it.
Otherwise, you want some other kind of agreement with your co founders. It's not likely that the ideal agreement is one you can enforce through the weak economic incentives you can put in your corporate agreements (constrained by enforceability, tax considerations, what would totally freak out later investors or acquirers, etc). You will just have to rely on loyalty, integrity, etc. And it's fairly well known that adding weak but salient economic incentives to strong moral ones has a perverse effect. I don't think I can explain this any more clearly.
(And if you can't completely trust your partners, why worry about them leaving, but not about them colluding to fire you and repurchase a bunch of your stock? And isn't the prospect of a high stakes negotiation that could blow up your company a stronger incentive than losing some predictable fraction of equity?)
No matter what you do, there will be risks. I think what balance of risks is best depends on you, your partners, and your situation. We are in full agreement that you should address this issue, in one way or another, early.
(It hasn't been that long since I've raised money from a "real VC", but who knows? I'm happy to leave that out of the conversation)
What if I'm not "indifferent" to whether my cofounders stay, but also can't see into the future? What if I'd like the option to continue a functional company even if one or more members of my team decide that it isn't a fit?
Why am I more worried about this situation than the ones where my partners conspire against me to steal my stake in the company? Because the situation I'm describing happens all the time, and, as I mentioned upthread, easily happen even when every party is acting in good faith.
ps
I have a pair of friends who went in on a YC company together. The partnership didn't work out; one left to join and eventually lead another YC company, the other stayed. Both founders had strong, liquidity-event exits afterwards (within months of each other, in fact). Nobody foresaw the partnership failing, but this (super ultra common) eventually was handled by the book, and everyone won in the end. I'm, again, having a hard time seeing the net downside of vesting.
Just to emphasize this, your equity should be vesting even if you're the single founder of a bootstrapped company.
There are often weird cases in startups where you need to negotiate against yourself, and it's going to be hard to convince a disinterested third party that you're acting in an equitable way unless you're putting a framework in place from the beginning to value the sweat equity you're contributing. Having a vesting schedule will give you leverage in the future, even if it doesn't seem like it's doing anything at the time.
This is nonsense. If you have a solo bootstrapped company that has any chance of making revenue or providing you income in the nearish future (which is what boostrapped means) then you should use the company structure that offers the most favorable tax consequences and worry about all these hypotheticals if and when they happen.
Disagree. Just because you start bootstrapping doesn’t mean you won’t change your mind one day and take on some investment. Put yourself on a schedule and give yourself options when it comes to funding.
Just because you have an “obvious” path to a sustainable business doesn’t guarantee it will be big enough or fast enough to meet your vision or the demand when you find it.
Not every restaurant starts out selling sandwiches on a food cart.
I'm sure you're way more experienced with this, so I'd love it if you could break this down for me a little bit more. Because as the solo founder of a bootstrapped company, this sounds absolutely ludicrous to me.
If I'm the only one on the cap table and half my equity is not yet vested, who does it belong to if I "leave the company"? And in the event that I run into a bizarre situation like the one you hint at, why can't I just setup vesting at that point?
> If I'm the only one on the cap table and half my equity is not yet vested, who does it belong to if I "leave the company"?
So that's a moot question. The assumption here is that even if you're currently a solo bootstrapped founder, you still want the optionality to hire people and/or raise money in the future. (Because burning your ships aside, you generally shouldn't give up free options.)
So then you run into issues like figuring out how to compensate yourself for money you've invested in the business. And since most businesses fail, by definition most businesses aren't worth anything after four years. Which means that if some but not all of the team is still working on the business, then you need to figure out how many shares to re-up yourself in the situation that the business isn't worth anything or is worth very little. If there are other people on the cap table at that point who have put work or money into the business then you need to figure out what's the equitable amount of dilution they should take, which is already difficult enough as is and would be even harder to do without having some historical record of vesting over time. This isn't even that uncommon, I've talked with multiple YC companies that have gone through this and who are now on their way toward being successful.
I may just be really tired and not understanding, but I think we're talking past each other about two different things.
"Solo founder bootstrapped company" sounds to me like "90% of small businesses", and I'm pretty sure virtually none of them have founder vesting, and yet they manage to hire people without the business owner having to vest their shares. Do you just mean in the case where they're going to issue shares to employees? So if I've been running this company for a couple years and I hire someone that I want to compensate with equity (which would be pretty unlikely, given that I think that's generally a crummy deal for both of us), why exactly can't I set them up on a normal vesting schedule?
Similarly, I suspect VCs are perfectly willing to invest in teams where the sole founder didn't previously have vesting setup. Indeed, I'd expect that's nearly always the situation.
So if I want to raise money, why can't we work out a vesting schedule at that point, which I suspect is how it goes 99% of the time that investors want solo founders to setup vesting. They weren't vesting at all before then, because, why would they? Doesn't make any sense.
This seems a bit like buying life insurance when you have no dependents, because you might get married and have kids later. Yeah, so get the life insurance then. In the meantime, who is getting that money if you die?
> So if I want to raise money, why can't we work out a vesting schedule at that point
You can and you'll have to work that out with your investors even if you had a pre-existing vesting schedule. But if you already have a pre-existing vesting schedule then that provides a much stronger anchor for the negotiations rather than just walking in there and saying what you think is fair or waiting for the investor to say what they think is fair. It's the same reason for giving yourself double trigger accelerated vesting in your stock purchase agreement. It doesn't (usually) legally mean anything because it needs to be re-negotiated anyway with the company that's buying you, but it provides an anchor for negotiations.
It also doesn't take any work and doesn't cost anything. And especially at the early stages where a lot of what determines the valuation of your company in an investment scenario is how much time the investors think they're going to need to spend babysitting you, I don't see any downside in erring on the side of running things in a professional way. And if you can show that you're capable of running things in a professional way, people will be more likely to defer to how you want to run the company.
> It also doesn't take any work and doesn't cost anything.
To be honest, I think that if you're a solo bootstrapped startup founder, pre revenue, pre employees, pre investment, then any second you spend on anything other than getting to product market fit is a waste.
I've seen too many companies from the inside that were very proud about how well they had done, and I quote, "their legal homework", before having gotten to anything even vaguely resembling product market fit. None of them are around now.
And to add a personal anecdote: my cofounder and me began a vesting schedule on our first investment (an accelerator), and that went fine.
I think this is fairly common, at least for employer sponsored insurance which is buy within six months of starting or forgo forever because of adverse selection effects.
As for the last part, mine goes to my siblings if I die.
> This isn't even that uncommon, I've talked with multiple YC companies that have gone through this and who are now on their way toward being successful.
That they are YC companies by definition means they are not solo bootstrapped companies, since YC involves raising outside funding (not to mention they aren't made by solo founders).
I agree a vesting schedule is a good idea for all companies, as it makes it easier to bring on more founders or raise outside funding in the future but it's definitely not necessary for a true solo bootstrapped company.
Kinda like the Cruise fiasco? [1] In that case, the cofounders represented, very early on, that they were equal partners with no vesting schedule, which was a major headache when GM came to buy them out, and the cofounder that left early got to show legit claim to a huge stake.
[1] Earlier thread on Cruise where I defended the position that a founder deserved full equity (modulo later dilution) because his cofounder didn’t think to establish a vesting schedule or, failing that, to buy him out: https://news.ycombinator.com/item?id=11741652
Now that we have a fair system set out, there is one important principle. You must have vesting. Preferably 4 or 5 years. Nobody earns their shares until they've stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it's terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there's some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Fun fact: nobody owns a C corporation until the company actually issues shares, which is a good thing to not forget to do. (Occasionally discovered by serious professionals during due diligence, at which point fixing it will cost, at the minimum, an unfun professional services bill(s).)
(The instrument which issues shares to Cofounder X will, in most cases in Silicon Valley, condition it on vesting via a repurchase right or similar mechanism.)
FATCA comes into play when you have a bank account and primarily when it has over $10,000 in it
If you dont have a BANK ACCOUNT and with national currency or securities in it, then there is no FATCA
Hm if that wasnt clear, stablecoins/crypto are exempt. Several stablecoins are FDIC insured according to the issuer. Form a US company just to access the international banking system and put a title on rent and pay for a github account. Let your international company just use crypto.
Not only is it typically not immediately vested for founders, but it's not totally uncommon for future rounds to "unvest" founders.
E.g. let's say you raise your A after 4 years, the terms of the round might require that you unvest 2 years so that the investors have you locked in for longer, to avoid the issue discussed in the original post.
It's a helpful thing to put in place if you have more than one founder. It makes it clear to everyone ahead of time what happens if one of the founders leaves.
It was a surprise to my cofounder and I too when we started but our attorney told us investors prefer it. Makes sense that I wouldn’t own half a business if I quit in a week. We signed the papers and don’t really think about it, especially since we’re partners as well it would put investors at ease if we had some legal binding to the business long term
Exactly. Good luck explaining to your investors for the next 10-15 years why 50% of the company's value is not accessible to you, them, your employees, or one day the public markets.
Could you not dissolve the company and then start a new one that does the same thing with different founders? Or are there legal issues with founding two companies that do really similar things?
Dissolving the company would require liquidating its value to return it to the existing shareholders, so the guy that left 2 weeks in is getting his 25% either way (he is, after all, a partial owner). If the company is really worthless, you could maybe claim that the company has zero present value and then immediately start another one, but that would still almost certainly constitute fraud.
I think that's normally the case if you have cofounders or if you take investment. I started a bootstrapped company without any cofounders or employees, so I didn't set up any vesting schedule. I just own 100% of the company.
You need different sets of skills at different times. Peter Thiel eloquently articulated this as “before you can have a company vision, you need a company mantra”.
In the beginning the work is about instantiating the product into the world. It’s unclear what bumps you’re going to run into so you have to be careful about overdefining the problem. You also can’t have no definition or no work gets done. It’s tricky (this is the 0->1).
The 1->Many is different. You also can’t over constrain the problem but you need a lot more definition and constraint than you did before product market fit. Not everyone likes this part.
If you have a founder who does the 0->1 really well and has a massive equity position, but they don’t do the 1->Many well, that’s going to make the company very, very difficult to govern.
It’s tricky to think about how to reason about this because many people think they can do everything. Not everyone is a creator, and not everyone is an operator.
It’s not obvious (and if there isn’t a big success incentive, it’s hard to get good people to work on the problem).
Box’s market cap is $2.5 bil, so that’s still $85 mil. If he can take actions that increase their market cap 10%, that’s still $8.5 mil for him personally. I feel like his interests are still very aligned with “grow Box”, even if he isn’t given more equity.
True, but he could always divest before leaving. In theory that seems like the right move if he's undercompensated, assuming that his motives are purely financial, that the market has valued the company correctly, and that his career won't suffer from "quitting".
I believe he was 1 of 4 co-founders, and then raised 11 (according to crunch base) financing rounds. If you get diluted even a very reasonable amount 11 times, you won't end up with a large percentage of the company.
Basically if a company is successful they'll probably raise many rounds and then end up with their founder/ceo only having a small portion of equity. At this point, the founder/ceo might be rich and has "made it" so could easily leave and be happy, but investors may want them to stick around. One way to get them to stick around might be to compensate them with even more stock.
Obviously depends on the situation, but it seems silly to lose a founder/ceo because investors didn't want to dilute their equity and give the founder/ceo a little more.
For most Founders who go the VC route,the reality is your boss is the investor. Crowdfunding 2.0 aka Security Tokens will change this dynamic. Then your boss is the market, which is more healthy.
Large shareholder-employees stick around because they believe they can grow the value of their company.
A CEO owning double digit share of their company doesn’t need more shares. What they want and need, most of all, is dry powder to grow.
Secondary to a large war chest comprised of equity pool and cash to pay salaries, is a decent salary for themselves to keep the family happy with their living conditions while the CEO is basically unavailable as a partner, off trying to grow their company.
I’m surprised that the blog post seems to miss this? I generally have high regard for AVC posts.
A CEO/Founder is never going to be able to double the size of their slice of the pie. While the CEO/Founder is absolutely crucial in doubling the size of the overall pie. At 4 years in I’d say most VC funded companies are still aiming to be 10x’ing the size of their pie at the least.
An equity grant at 4 years in should be totally irrelevant. Deck chairs on the titanic. A little anti-dillusion is nice but not necessary. It’s all about the size of the pie, not the slices, at that point. And growing the pie requires funding on good terms, and massive focus and execution. Generally that means long hours and time away from home, for which a $200k salary helps tremendously to keep the family on board for the voyage.
This idea of keeping the family happy suggests a niche market unto itself. I can think of a few services that would make that easier. There are a bunch of high end concierge services out there, but one that focused on founder families is like an extended family office. Gears turning.
This in my mind doesn't address two key items (unless I somehow missed it?)
1) If you truly care about the business, and it's not just a numbers game, you might have some emotional attachment to the product, and the people working for the company. This complicates things for everyone.
2) Leaving will likely devalue your stock. Bad for investors, probably worse for you (as it's likely your largest asset). Pulling yourself out unless the company is in a super strong position, with a likely high chance of hiring a good replacement may not be super smart for your own finances.
Investors are usually diversified, holding stakes in lots of different companies. Meanwhile, founders are usually all in with all their eggs in one basket (albeit a basket they are guarding intently). An alternative to asking for more equity is to negotiate for a higher salary, and using those funds to diversify your holdings. As you'd expect, this conversation is easy if the business is going well, and isn't if it's not.
I have a question - Is founder vesting standard outside the valley/software startups?
If I and my partner set out to build (say) a restaurant franchise in Texas, do 4 year vesting schedules, cliffs, etc make their way into incorporation documents? How do things work in non-silicon-valley-startup businesses?
Either vesting is a part of standard business incorporation (in which case I don't see why it needs special discussion in a software startup context, we don't need to discuss whether a company should have annual or quarterly balance sheets, for example - such 'standard elements' are taken for granted) or it is highly software startup specific (in which case there might be interesting rationales for such provisions existing that are specific to software, software startups, or conventions of SV VCs)
Founder vesting is usually set up either at the onset to protect multiple founders from breakups, or as a term requested by investors in a priced round of funding.
If you set up a business of any type, you're free to give yourselves a vesting schedule or not. If you take on smart outside capital, it may be a term they require.
Software is somewhat unique in that it takes relatively little capital to start a business, outside of the sweat equity that the founding team puts in.
If you're opening a restaurant in Texas with someone, you're looking at something like $100k to $250k each, depending on local regulations and what kind of scale you want.
This is a good post and it was pretty comprehensive. Worth noting however, that there are many more hairy solutions Fred didn't raise.
For instance, some founders will negotiate a grant upon IPO or upon sale of a company beyond $x dollars as a way to try and align interests with investors. The problem with those is that it can cause unnatural behavior (eg, Snapchat IPO'd too soon, I'd argue, because Evan's investors gave him a grant that vested upon a qualified IPO exceeding a certain price. Or the tax issues late-breaking grants can create upon a trigger.)
> the company would have to go out and hire a new CEO and that new CEO would get an equity grant that would be between 2.5% and 7.5% of the Company, depending on the value of the business.
If this is true, it’s much better to come in as replacement CEO than to be a founder. After four years and multiple rounds of financing much of the risk has been mitigated. Additionally, no incoming CEO is working in their garage and mortgaging their house.
There is, of course, the FYIFV (Fuck You I'm Fully Vested)[1] trope that originated at Microsoft. But I doubt that Gates and Allen were part of that. :)
What I saw at one startup that went public is that the founders didn't start out with a large amount of stock. But after the IPO the board (the founders' buddies) would continue to award them substantial stock grants, even though the company was doing just OK not great. That's not a scenario that's covered by the article.
> 2/ But that argument about how a new CEO should be compensated essentially puts on the table the question of whether the founder CEO is actually the best person to run the Company right now or if there is someone better suited to do that who could be recruited for a new market equity grant. It is often not in everyone’s best interests to have that conversation.
Why would it not be in everyone's best interests to have that conversation?
The CEO might not get to stay in their highly-compensated, prestigious position that they presumably worked very hard for.
The board might have to answer questions about why they didn’t start looking for a new CEO sooner.
The company might have to suffer through the trauma of switching CEOs.
All shareholders might lose some equity if a large grant is given to the new CEO. (Nearly equivalently, the company will lose a large chunk of the shares reserved for new hires, reducing its flexibility in hiring.)
Think of ownership as percents of a whole, not little pieces of paper. You can't own more than 100% of the company collectively, and the more the CEO owns the less other people will.
> Think of ownership as percents of a whole, not little pieces of paper.
Shares don’t represent a percentage of anything other than the current number of issued shares. No one should be expected to work for free. New shares should always be created whenever someone contributes labor, capital, or some other asset. If existing shareholders aren’t being continuously diluted as people make new contributions to the company then something is going seriously wrong. Just because someone got shares for a previous contribution doesn't mean you don't need to pay them for future contributions.
I mean would you expect your series A investors not to get any shares because you already gave some shares to your seed investors? It makes literally no sense.
Your options pool should be negotiated with your investors to cover your first X (e.g. 100) employees. It makes no sense for it to cover founders, nor does it make any sense for it to cover some indefinite amount of future labor.
Um, no... company shares represent a "share" of the company's value.
I think you need to understand what "dilution" means here.
Say your company has 100 shares, and is worth $1000, so each share is worth $10. You create another 100 shares. Your company now has 200 shares. But the company is still exactly the same company. It didn't just double in value, it's still worth $1000, so now each share is worth only $5. Each share got "diluted" in value.
If you, as a loyal employee of many years service, were holding 5 of these shares, then the value of that loyal service just got halved. You would be annoyed at this.
Company valuations need to go up in order to issue new shares without annoying people. Seed investors buy shares when the company is small and not worth much. When the Series A people come in, the company is much bigger and worth much more. So the new shares can be issued without annoying the existing investors because their net value remains the same (or usually goes up).
Randomly issuing new shares without an increase in company value will annoy everyone, which is why companies don't just issue new shares whenever they feel like it.
Creating shares, regardless of changes in company value, dilutes percentage ownership of previous investors. I think your definition of "dilution" isn't capturing this aspect of GP's comment.
Sure, it dilutes the percentage owned. But unless you have a down round, you have more value.
If someone has five shares at $1000 total valuation and 100 shares, they have an equity position worth $50 and 5%. If the company grows and issues another 100 shares but the price paid by an investor for those shares is $5000, that means that each share (ignoring preferred share premium, which is ok in the abstract but shouldn't be ignored in reality) is worth $50. The five share owner owns less of the company but what he or she owns is worth more ($250 vs $50, but 2.5% vs 5%).
This is exactly how each round of investment works. The board creates new shares for each round. Previous investors wanting to maintain their percentage ownership must invest again.
A new investor brings money into the business to "purchase" those newly printed shares, so diluting previous investors' percentage of ownership doesn't necessarily change their material position unless there are more strings attached to the investment.
For example, if an enterprise was worth $100M before investment and then there's a new investor that brings in $100M, the new investor owns 50% of a $200M pie and the previous investors combine to own 50% of $200M as opposed to 100% of $100M.
Nor should they, because it's the investor who is contributing something new, not the employee. Employees should get re-upped when they are close to fully vested.
Of the founders I have met that are fully vest, most stick around. I presume because they have a comfortable lifestyle or their shares will be worth more by their direct participation in the company.
I firmly believe that true altruism does not exist and find it insulting when I'm told otherwise. There's always a trade off.
You can of course say no, but nowadays it's so common that you are unlikely to find someone who would make a deal without it. Basically it goes to show that the people who have the money are the ones who have the power, not the CEOs of start-ups.
It’s not about being babysat, it’s about downside protection for VCs. If you’re competent and believe in your business (which any founder CEO should be and do), your personal assessment of the risk of you leaving should be effectively zero — meaning this term (“founders must adhere to this vesting schedule”) reduces to, “sure, if that makes you happy, let’s negotiate on more important things.”
Not agreeing to this term (or negotiating heavily) when accepting investment capital can be a huge red flag for this reason. It immediately weeds out people who aren’t committed to the business.
The biggest reasons we require founders to be on a vesting schedule is not really to protect our investments (as mentioned by another commenter). If the founders were to decide to screw us over somehow, our investment is already toast, and we potentially have other recourse.
It's to protect founders from each other. Most successful startups have multiple founders, but the most common reasons for failure is also disputes between multiple founders. Bad founder breakups are frequent. They can be survived, but only with a vesting schedule for the founders, so that the remainder founders aren't screwed by having to, in essence, work for the founders who left.
If you have two founders, and one leaves after 2 years due to a disagreement — without a vesting schedule, the remaining founder would have no motivation to continue to create value, given all the value he creates goes in an equal amount to the founder who left.
Even with a vesting schedule, in this case, we'll typically negotiate to repurchase the majority of the stock of the departing founder.
So what explains the rote implementation of this logic on single founders too?
I expect to be heavily downvoted for even suggesting these things on this board (as my original comment was) but this logic reeks of VC bullshit and I suspect you won't refute that despite your assertion that this is totally only about co-founder protection you wouldn't hesitate to impose such a vesting schedule on a solo founder, likely using some of the other arguments in this thread that you've even discounted in the original post.
Perhaps the downvotes are because you call it "VC bullshit" — which is not a very thoughtful or productive way to debate ideas.
Having it for solo founders makes sense in case another founder or executive comes later, in which case a similar issue can arise. If you truly are a single founder, there are very very few situations in case you'd leave involuntarily, given there wouldn't be anyone with the power and voting stock to fire you, and given your departure would likely mean the death of the startup.
There's very little downside to accepting a vesting schedule as a solo founder.
Kenneth — to defend the posters in this thread, I would wager that there’s a nuance to term sheet / contract negotiation here that’s easy to be ignorant of if you’ve never been in the situation. If you haven’t been through the ringer re: fundraising, building a business it’s very easy to assume that (A) if a company is successful then (B) I can define the terms, fuck all the rest. The reality of most successfully funded startups is that there’s no one reality, and it’s easy to understand that an HN reader might think; “vesting for founders? That sounds like bullshit!” Without having gone through the logical leaps of;
- Is the opportunity real?
- Can I build a product to start testing the hypothesis?
- Can I recruit believers (customers, investors) to help test my hypothesis and make it a reality?
- Finally, do I believe there’s a hypergrowth opportunity, what are the risks associated with pursuing that, and how do I minimize them without affecting the size of the opportunity space?
Once you get to the latter step the largest risk early on is lack of access to capital, and there are a lot of ways to negotiate that materially affect hypothetical “hypergrowth” potential (valuation / dilution, liquidation preferences, you name it) which make founder vesting schedules borderline irrelevant beyond aligning cofounder expectations and making sure people are bought in. You see it in a term sheet and go, “okay, what’s this?” — forward it to legal and get back, “standard terms, bigger fish to fry, move on.”
If you’ve never put the blood and sweat in to get to this point in negotiation it’s probably easy to overemphasize the role a founder’s vesting schedule plays early on.
You do see the irony in shouting down my characterization and then shamelessly exemplifying it don't you?
A vesting schedule is someone feeding you your equity back to you over time. Pure and simple. Of course it's easy to see why someone would accept such terms: VC's are offering to hand over large amounts of money. If it's a term most founders are willing to accept without getting much additional in return that is perfectly fine and up to each founder.
Anyone who accepts it as "a favor this VC is doing for me" is delusional.
I began as a solo founder and I (gladly) accepted a vesting schedule as part of our first money in.
There are very few legitimate reasons that founders shouldn’t be willing to accept vesting schedules for their own ownership — I mean, there’s one: that you believe the value and potential of your company to be so great in a short time horizon that you can get rich quickly and leave within a couple years, and also believe with 100% confidence that the risk to do so is negligible and external factors (market downturn, you name it) will not be able to impede your progress. Call me when you build that company; it’s roughly equivalent to the perpetual motion machine of company-building.
Vesting schedules for founders are standard terms and there are a multitude of reasons they’re standard — as a founder I can give you reasons, and VCs can give you plenty more. As somebody who began a solo founder, there was no intracooperative founder risk to me accepting a vesting schedule and I did so anyway without hesitation, for the reasons I outlined earlier.
Let’s say you launched a company, bootstrapped it to the tune of say $500k, have customers and business, then a VC comes along with “standard terms” trying to put you on a vesting schedule, for your own damn company... what is your response going to be? Quite likely it’s not going to be - “I run it by my legal department and they said Ok”.
so you are saying you are not negotiating about your ownership of the company? WTF...are you really that desperate for their money that you are basically an employee of a VC subsidiary now?
grow up people, and found companies that actually can stand on their own.
Please express your points thoughtfully rather than in the flamewar style. If you rant like this or otherwise do the latter, it ends up having the same effect as trolling.
And you can't even bootstrap either in some situations. The basic premise is, if you're not rich you are not free. The good thing about the modern world is that you can choose your owner and switch between them when things go sour.
A vesting schedule is useful if you have cofounders, or VC investors.
You want to know that your cofounders (or a VC will want to know the founder) has a very real reason to stick around, especially in the toughest years.
Otherwise, you could jump ship at anytime and keep ownership of a huge part of the business.
You're being paid peanuts compared to what you could be making in the industry (generally your comp is garbage until maybe Series C) and your equity is already as good as it's ever going to get, so some reasons to stay behind are:
1. you're really enjoying the gig
2. you think that by you staying behind, the overall worth of your equity will be higher than by having someone else take over
3. you think that quitting at that stage will be a permanent black mark on your record, the captain abandoned the ship
4. you're totally out of money after years of trying to make ends meet with a startup founder gig, so you can't start a new company without spending a year or two working for someone else first
There's real opportunity cost to sticking around. You could be starting a new business and begin another 4 year vesting countdown there. Maybe you're ok working for someone else, you could be at Google collecting a 1/2M paycheck, feeling like you're on vacation compared to a growth stage CEO job. Maybe you just want to take a breather and actually have time for your spouse and kids for a little bit, before another dive.
Tricky spot.