This is a very important topic to ensure that your startup continues to be controlled by founders dedicated to its cause.    What you want to avoid is a situation where a group of founders form a startup and each hold a similar percentage of the issued shares – without any restrictions on such shares.   If only one or two of the original founders continue working for the corporation, and the rest stop, and either get other full-time jobs, move away, leave the country, etc., then the founders that are still around can be stuck and essentially handcuffed from making certain corporate decisions.  If the corporation, as most due, requires the majority of the issued shares to take certain actions, and the corporation brings in other people from the outside as shareholders and/or directors (usually investors), then the founders who have stuck around will have essentially less of a say in major corporate actions.  And if there is a liquidation event, then the founders who have left will get paid without having to put in the hard work.

To make sure that this doesn’t happen, you want to be sure that you “vest” all of the original founders stock.  This is usually done in the Restricted Stock Purchase Agreement that each founder originally purchased his or her shares through.  The agreement will contain the vesting schedule, which is the timeline over which the stock will vest.  The Silicon Valley vesting schedule is to have the stock vest over four years with a one year “cliff” – which means that none of the stock will vest the entire first year from when the agreement is signed, and after the first year the stock will vest over the next three.  The vesting can be done on a monthly, quarterly or annual basis.   So in the Silicon Valley model, if you vest monthly, you will receive none of the stock the first year, and after that you will receive 1/36 of the stock each month after the first year, so that after four years all of the stock will have vested.  I usually recommend monthly vesting, so that there is a continual motivation for founders or employees (you can and should also vest stock options) to stick around, because if you vest annually, what you will likely be faced with is if someone plans to leave, they will simply wait until the year mark where a chunk of their stock vests, and then they will give their notice.

How vesting actually works is as follows: if after the stock is issued any of the founders leave the “employ of the company” or stop their “continuous service status” to the company, then the corporation has a right to buy back all of such founder’s unvested stock.  The word “vest” in this instance is actually a misnomer, but it is commonly used to refer to the mechanism.   How you vest the stock is to grant all of the stock to the founders on day one, and then give the corporation the right to repurchase the stock that is unvested if the founder leaves.  According to the vesting schedule, the corporation will, over time, have the right to repurchase less and less of the founders stock.  So if the founder stays with the company for the entire time horizon of the vesting schedule and the corporation’s right to repurchase no longer exists, all of the founders stock will have vested, and the founder will own 100% of the stock outright.  If the founder leaves the employ of the company before all of his stock has vested, however, then the company has the right to repurchase all unvested stock at the price contained in the agreement.  There are different ways to set this price which we’ll discuss in later posts.