Founder leaving start-up that needs advice on equity agreement...

October 29th, 2013

I have been working on my start-up for a year and my co-founder and I have decided its best to part ways. Do I get to keep my portion of vested equity? We have a vesting agreement and the amount of equity I own is clear, but my co-founder is under the impression that when I leave I have to sell back my equity (my vested equity). Can you share your insight on this? Do I have to sell it back or not? Why? Why not?

James Bond CTO at SupplyBetter

October 29th, 2013

What your co-founder is referring to is what happens with the unvested portion -- either you never received it in the first place; or, if you had an option to pre-purchase it (which can be beneficial for tax purposes) which you exercised, is subject to re-purchase by the company. But *only* the unvested portion. The portion that is vested is yours, you own it free & clear (that's more or less the definition of "vested").

Mike Moyer

October 29th, 2013

Short answer: yes, you get to keep your shares. Fair answer: if you are leaving the company in the lurch and they will now have to find someone to replace you, you should give back all or part of your shares (with some exceptions). The circumstances under which you leave a company matter (http://www.slicingpie.com/the-good-way-to-say-good-bye/) If your co-founder offers to sell them back you would be smart to do so. If the company isn't exciting enough for you to stick around it's probably going to fail. Most start-ups do. You will be the only person who makes money on the startup and you will have a little exit under your belt which will bode well for your future. -Mike Moyer www.SlicingPie.com (a site about equity splits)

Michael Barnathan

October 29th, 2013

Unless you signed an agreement to that end, you don't have to do anything. Vested equity is yours. *Forcing* a buy-back is essentially repossessing your property. However, there are often reasons you'll want to negotiate a buy-back rather than hanging onto the equity:

First, you want to avoid bad blood in the relationship if possible - even if the company fails, the startup world is small, and your partner for this venture might return into your life later on in some other role.

Second, investors won't like absentee stakeholders. This will hurt the company's chances of securing the funding it needs to grow, and consequently increase the risk of your equity.

Third, the company can do things to dilute your stake after you leave, more than they would be able to do while you're there (even in ways they could unilaterally dilute you while there, they wouldn't want to do it because it would probably cause you to become disgruntled at the unfair treatment).

It's your choice (if you didn't sign an agreement with a buy-out clause), but if you're being offered a fair buy-out, it's usually a good idea to accept. It recoups the value of your time spent there, removes the risk, and allows the company to allocate an adequate amount of equity to your successor. If the company succeeds, you'll still gain prestige from being associated with it, which will help you in your next venture even if it doesn't result in a big cash-out on this one.

Michael Barnathan

October 29th, 2013

As an aside, I see some comments here that suggest people are just "signing on the dotted line" without really understanding what it is they're signing. I never understood why people would work on an equity basis then not read the agreement *very carefully* before accepting it. The stakes are high, and the cost of being duped can be severe. You really do need to understand the ins and outs of the various clauses that can be attached to it or you could get burned later on (I say "could" and not "will" because I believe that most founders are generally pretty fair toward their co-founding team, and try to do the right thing regardless of the legal agreements in place. At least until the company gets bigger, which is when you'll really appreciate having a solid legal foundation for your grant...)

John Adolph ♫ "Some people call me the firm lawyer / Some call me the startup CEO / No people call me Maurice"

October 29th, 2013

No one here will be able to answer this question definitively for you as the terms of your vesting agreement will govern. Although forfeiture of vested equity can be limited to specific situations (i.e., bad acts), it's possible your agreement requires a departing founder to forfeit equity.

Also, depending on what you two have signed, you may need to look at any non-compete provisions, etc.

Roger Smith

October 29th, 2013

Like John said it depends on your agreement. But in general your vested equity is yours to take with you. The company has the option to buy back your unvested shares which in most cases will happen.

William Grosso CEO, Scientific Revenue

October 29th, 2013

Generally speaking, the point of vesting is that the vested stock si the stock you get to keep when you leave. What you have to do depends on the legal agreements you signed. Just be aware: there are many ways to screw over shareholders who leave-if it's going to cause bitterness, better to find an amicable price. Bill

Michael Richards GoMotive CEO (mobile client retention system) & PRR Chief Operating Officer

October 29th, 2013

Ridiculous as it sounds, founder stock agreements often have a provision that allows the company to buy back stock at the original price even if a co-founder's stock is vested. Our attorney for gomotive wrote in this provision even though I said we did not want it. This helped lead to his later dismissal, as we needed to revise the agreement when a co-founder signed up and balked at the unfair clause. Confirm your agreement has this provision. Perhaps there is a way to argue it was not disclosed or if the main founder described it otherwise. Good luck. Michael Sent from my iPhone Michael Richards 206-696-3830

Anonymous

October 29th, 2013

Hi Sergio, If it's vested, you own it. But I would check with an attorney, because every vesting agreement and founder agreement has different caveats. Do you have any acceleration clause, for instance?

Dave Sifry Head of Product at Addapp Corp

October 29th, 2013

You sell back your unvested equity. Your vested equity is yours to keep.