Founders Understand Vesting or Risk Losing it All

Founders: Understand Vesting or Risk Losing it All

For aspiring founders, understanding the concept of vesting is crucial to safeguarding your stake in the company that you're building. Vesting is a mechanism that can significantly impact your ownership and financial outcome, especially when dealing with investors. This blog post delves into the intricacies of vesting schedules, the rationale behind them, and how you, as a founder, can protect your interests, particularly in scenarios where your role in the company might be jeopardized.

The Essentials of Vesting:

Vesting is a process where your ownership (equity) in the company is earned over time. Let's consider a scenario: you secure $10 million from a venture capitalist for half of your company, valuing your startup at $20 million. As a term of investment, your equity will be subject to a vesting schedule. This term might sound perplexing, but it's a standard practice in the venture capital world.

Decoding the Vesting Schedule:

  • What is a Vesting Schedule? A vesting schedule is an agreed-upon timeline during which your right to the shares or equity in your company becomes fully exercisable. In simpler terms, it dictates when and how you, as a founder, earn your portion of equity.
  • Standard Vesting Practices: The most common vesting schedule in the venture capital realm spans four years, with a typical structure of monthly equity accrual. For example, if you are granted 48% ownership, under a four-year (48 month) vesting schedule, you would earn 1% of your total equity each month. This schedule ensures that your full ownership is realized gradually, incentivizing long-term commitment and contribution to the company's growth.
  • Cliff Vesting: Often, vesting schedules include a 'cliff,' usually a one-year period, during which no equity is vested. After the cliff period, a significant portion of the equity vests at once, followed by monthly vesting.

Why Vesting Matters in Venture Capital:

  • Risk Mitigation for Investors: From an investor’s standpoint, vesting schedules mitigate the risk of founders exiting prematurely after receiving funding, leaving the company without its key leadership.
  • Incentivizing Sustained Contribution: Vesting aligns the founders' interests with the long-term success of the company. It ensures that founders are committed to growing the business over the vesting period to realize the full value of their equity.
  • Regulating Equity Distribution: It controls the distribution of equity, preventing any immediate and total transfer of ownership, which could potentially destabilize the company’s governance.

The Gnarly Reality of Founder Vesting:

Now here’s where it gets gnarly. It's not uncommon for founders to get fired post-investment, especially in the early stages of their vesting schedule. Without specific protections in place, such as in the articles of incorporation or employment agreements, founders risk leaving behind a substantial portion of their unvested ownership. 

Imagine a situation where, as a founder, you are unexpectedly dismissed from your company. Without an accelerated vesting clause in your employment agreement, you stand to lose any unvested equity, which could be a substantial portion of your ownership. For instance, if you are two years into a four-year vesting schedule and are dismissed, traditionally, you would only retain 50% of your equity.

However, with an accelerated vesting clause, this situation changes dramatically. In the event of your dismissal, the acceleration clause would trigger, allowing you to immediately vest all or a significant part of the remaining equity. This means instead of walking away with just half of your equity, you could potentially leave with your full equity stake intact.

Safeguarding Founder Interests with these Key Elements: 

For founders, having a personalized employment agreement is not just a formality; it's a strategic necessity to protect your stakes in the company. This agreement plays a pivotal role, especially in scenarios where your position within the company may be at risk. Here are the key elements to consider in your employment agreement: 

  • Protective Clauses: The agreement should include specific clauses that safeguard your interests. These clauses need to be clear and precise, outlining the conditions under which they apply.
  • Accelerated Vesting Provisions: One of the most critical aspects of this agreement is the accelerated vesting provision. This clause should clearly state that in the event of your dismissal (whether for cause or not), your equity vesting will accelerate.

The Importance of Timely Employment Agreements in Company Formation

At the formation of a company, one of the first steps taken is the creation of articles of incorporation. These documents lay the foundational legal and operational framework for the business. However, an equally crucial step that should immediately follow is the drafting of the founders' employment agreements, particularly focusing on key terms such as acceleration clauses.

Regrettably, many founders overlook this critical step in the early stages of their company's development. Instead, they often end up relying on generic employment agreements that may not adequately address their unique needs or protect their interests. This oversight can leave founders significantly vulnerable, especially in scenarios where their role within the company might come under scrutiny or be subject to change.


Understanding and strategically planning around vesting schedules is a vital aspect of your journey as a founder. It's about more than just securing funding; it's about ensuring that you have a positive financial outcome, irrespective of the twists and turns your startup journey may take.

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