Seed funding · Vesting

Is vesting acceleration at seed round acceptable?

Sati Hillyer Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales

July 24th, 2014

Is vesting 25% at the seed round normal even though it's only been a couple months? I know we've moved fast, but is that standard?

I thought the idea was to have various milestones over the course of first year, but one of the cofounders says it's normal to vest the entire first year (25%) once we close seed. 

I know that would be good for me as a cofounder, but not sure that's good for the company. 

Thoughts?
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James Bond CTO at SupplyBetter

July 24th, 2014

In your dreams... :-)

Seriously though -- you (the Board of Directors) can do anything you want with respect to vesting. But as others have noted, it may hurt your chances of future investments, even if it doesn't kill the seed round.

Perhaps a more important question to ask is why you had a 1-year cliff in the first place? Generally it's so a co-founder doesn't walk away with a significant number of shares, if they decide to quite after a few months. But whatever the reason, what about it has changed, just because you're getting funding?

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

July 24th, 2014

Your co-founder is confused between accelerating triggers (change of control, termination, etc.) and a funding event. I suspect that your investors will not groove on vesting acceleration. Your co-founder suddenly wants to accelerate his ownership of a thing that just acquired real value. (Previous to the seed funding, your equity had no real value.) But once someone has placed a value on it, your cofounder wants to have more of it faster? That seems mis-informed at best and concerning at worst.

Kate Hiscox

July 24th, 2014

What does your seed investor say about that? Personally I have never heard of that and it wasn't the case for us.

Kate Hiscox

July 24th, 2014

Honestly, it won't much matter. Your investor will determine the schedule and you should fully expect 4 years with a 1 year cliff and as someone else mentioned, your interests should align with those of your investors.

Sati Hillyer Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales

July 24th, 2014

Thanks all, it's clear that my thinking is not unwarranted. I will discuss with the cofounders and see where we land. But sounds like investors influence will play a big decision.

Kishore Swaminathan Creative thinker & doer.

July 24th, 2014

Thanks Kate - you are right, if are a C-corp and have an 83(b) election in place. By the way, can you do an 83(b) for an LLC or an S-corp?

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

July 24th, 2014

The way we set up vesting is the same for everybody. Your grant vests over 4 years, nothing vests until you have completed 6 months, and then the remainder vests monthly. That seems like a pretty regular way t do it. Milestone based vesting is unusual, and overly rewards the founder for getting to a milestone, not building a businessthe real value creation comes AFTER the product is built.

Kishore Swaminathan Creative thinker & doer.

July 24th, 2014

Vesting has to be looked at from two perspectives: as a tax event and as a golden handcuff. From a tax standpoint, there may be advantages to early vesting when the company valuation is lower. HOWEVER, you'll have to pay taxes this year on what may turn out to be worthless stock if your company goes under and then follow IRS schedule to recoup your losses over a number of years.

From a golden handcuffs standpoint, Vesting - especially 25% - does not make any sense to me and I doubt any sophisticated investor would allow it. Think about it this way: why is somebody rewarded with a 1/4 of a company which they can walk away with, when all they have done so far is helped to find a seed round. At least if you have started generating revenue or otherwise proven your business model, you can justify some vesting, but at this point, this is absolutely not a good idea.

Kate Hiscox

July 24th, 2014

Your investors will shoot it down if they are smart. They'll want standard four year vesting with a one year cliff. Probably the best you can hope is they won't want to start the one year cliff from the investment signing. But no way will they agree to 25% automatic vesting. Actually, I say that - maybe they will but in turn, I don't think I would want that investor working with me because it would speak to their experience.

Sati Hillyer Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales

July 24th, 2014

Yes, I'm talking about our seed investment round, not a liquidation or M&A event.

I haven't asked our investors, right now we are just discussing the business. Do you think I should bring this up with the investors, or will it come up regardless?

Do you suspect investors to see that as something negative?