Why Founders Equity Requires Vesting

Why Founders Equity Requires Vesting

January 31, 2020 by investor

I had a startup the other day approach me about investing. In the discussion it came up that one of the founders recently left and took half the equity with him.

It appears there was no vesting on the founders equity. Vesting means one has to earn the equity by continuing to work in the business over a period of time.

Founders think they don’t have to vest their equity since they founded the company, but it’s important that founders do so.

The primary reason is to make sure the founder stays active in the company for a reasonable period of time.

Other founders and employees will be working for equity so it’s not fair for a founder to stop working and take all their equity with them.

Investors funding a startup often require unvesting founders share and have them earn it back. If a founder leaves then the unvested shares go to those who continue to work in the business.

Even if there’s no investment driving the decision, founders should put an agreement in place that determines what happens if one of the founders leave.

With an agreement in place, a founder can leave at any point and his or her unvested shares will go back into the company.

This protects the founders and the investors.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.