Founder's Stock: Should You Subject It To Vesting Before A Venture Financing?
When the founders of a company invest in their business - either with money or their intellectual property - they get in return what is known as “founder’s stock,” a form of stock in the company that comes with voting rights.
Founder’s stock is often subject to a vesting schedule. That means if the founder leaves the company before the stock is fully vested, the company has the right to buy back unvested shares either at cost or at fair market value, whichever is lower.
So, is it recommended to subject founders stock to vesting even before a venture financing? The short answer: Generally speaking, yes.
The long answer is that when startups have more than one founder, each should want the company to be able to buy back the unvested shares if another member of the founding team leaves early. A vesting schedule can help incentivize each founder to remain with the startup and see it through what is often a critical stage in the company’s life. Also, the approval process for a startup to receive venture financing can be complicated if a founder were to leave early with fully vested stock with voting rights. If the terms of the vesting are reasonable, it is possible that the terms could survive the venture financing. To reduce the risk of losing his or her shares in the event control is lost through various rounds of financing, the founder could bake into the stock purchase agreement terms providing that vesting accelerates in the event the founder is terminated without cause or terminates his or her employment for good reason (e.g., the founder is relocated or demoted).