Founders · Equity

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

Sergio Marrero

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"). 

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...)

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.

Brian Backus Digital Product Strategy & Business Innovation

October 29th, 2013

You should be able to retain your vested equity. That is only fair, and would be the case with most standard agreements provided by the big law firms. 

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

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.

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.

Christopher Nguyen Co-Founder & CEO at ADATAO, Inc.

October 29th, 2013

It's up to the two of you---the law should follow the spirit. A good approach is to honestly assess whether the company is at a different stage thanks to the past year's work, or if it's at or near a restart. If the former, you should by principle be able to keep some or all of the vested shares. If it's the latter, you should walk away with little or none. If you each honestly see it differently, see if you can split the difference. There are legally justifiable ways a departing co-founder can be significantly diluted when no longer in an operating role. It's best to work out an agreement whose principle you have reasonable confidence will be honored. If you can't come to a principled agreement, there are always lawsuits. See what I mean? -- Christopher T. Nguyen Co-founder & CEO, Adatao linkedin.com/in/ctnguyen