Rethinking Founder Vesting - K9 Ventures

Rethinking Founder Vesting

By Manu Kumar | October 27, 2016
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So much of what we do in the tech industry is about innovation, disruption, and changing the status quo. But, when it comes to how we go about doing that some of the smaller details tend to get re-used based on previous norms and templates without being revisited or questioned.

One of these norms is how founder vesting and employee vesting works. I won’t get into employee vesting today as that has much more to consider than I have time to cover in this short post today.

Here is a good summary post from Cooley GO on Founder Vesting.

There are two main reasons for founder vesting:

  • To ensure founders stick around and build the company
  • To protect the founders (and investors) when a member of the founding team separates from the company prematurely.

The first is fairly obvious. Without founder vesting, if an investor were to invest in a company, a founder could pretty much walk away the very next day with all of their equity intact thereby decimating the company and its prospects.

The second happens more frequently than you would imagine. Founding teams can fall apart for many reasons. This can include founders who end up with personal conflicts, or when one founder isn’t carrying their weight/delivering on what they need to do, or a change in the personal situation of a founder. Sometimes it can be as crazy as a founder having a medical issue for themselves or their family, which makes it impossible for them to continue working on the startup. It can even be as extreme as a founder dying — a medical issue, getting hit by a bus, a car accident, or falling off a cliff.

These are not situations that founders like to think about when they are embarking on their dream to build the next big company, but they are real and the reality is that shit happens. And when shit happens, you want to make sure that your company is structurally setup to be able to recover from the situation you are presented with.

The commonly accepted wisdom on founder vesting is to either have a standard 1 year cliff, and then monthly vesting over a total period of 4 years or to have just straight monthly vesting over 4 years. (IMHO the former — having a cliff, is better for founders than the latter — not having a cliff).

How did we end up on this 4 year number? I really don’t know — if anyone does, I’d love to find the source for it. My best guess is that it became the “norm” in legal templates for term sheets and founders documents and has just been continuing as is without being questioned for decades.

But, we all know that it takes time to build a successful company. More often than not it takes 5-10 years to build a company. If that’s the case, then why isn’t founder vesting spread out over a much longer period of time?

I’m going to leave that as a question and invite comments and discussion in the comments below. Let’s revisit the “norms” on founder vesting and figure out what makes sense for today.

Hat tip to Howard Hartenbaum at August Capital, as the inspiration for this post came from a conversation over breakfast with Howard.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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