Equity · Vesting Schedule

Vesting acceleration for founder in case of termination (without cause or resigning for good reason)

Anonymous

April 2nd, 2016

When raising money from investors what is typically the norm for equity vesting acceleration for founders in case of termination (both without cause or resigning for good reason)? I'm looking to better understand what is the norm that investors are accepting.

Is it common to have an acceleration clause in these cases?

If it is common, then what is the acceleration (3 months, 6 months, 12 months, 100%)?

Assuming you have a 1 year cliff, what happens if the termination happens during the first year when you have not vested anything yet?

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Chris Copple Chief Operating Officer & Executive Vice President at ETX Pharma, Inc.

April 2nd, 2016

Founders typically take 'founders shares' and options.  So, while you may face the vesting issues with the options (appropriately) the founders shares are owned outright unless you are otherwise contractually constrained.  Your remaining hazards then are associated with holding common rather than preferred (no liquidation preferences, tag along rights etc) and dilution.  Plus, you will have no say in the growth and exits of the company.  Better not to plan to exit so soon!

Thomas Loarie "Bringing Entrepreneurs and Technology to Life" CEO and Chairman, Mentoring and Coaching of C-Level Executives

April 2nd, 2016

Rather than accelerate options, I have retained key people who are leaving with good reasons by converting them to serve as consultants, at a very low contract rate. If need be, convert the ISOs to NSOs. There are many positives for the company to keep these people engaged and available. 

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

April 2nd, 2016

I've seen it both ways; sometimes you can get it and sometimes you can't.

"Fair" is for the employee (founder or otherwise) to stick around and earn equity over time. "Unfair" is for the board to fire someone because their unvested equity is worth a fortune.

I think it's a reasonable argument that if termination is involuntary, and not for cause, equity should vest. Same for constructive termination, e.g., the board demotes an executive and/or forces an unreasonable relocation. 

Vesting over time also suggests that value is added in equal measure over time, which isn't necessarily true.

I have a significant bias on this one. Investors/boards often say, "Oh, we'd never do that!" My response is always, "Great, then you'll have no problem writing that down."

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

April 2nd, 2016

Some decisions are best left until you know the circumstances under which you have to make them. Many vesting agreements do not cover acceleration under the circumstances you discuss. But with board approval management can usually get approval to grant acceleration to special individuals for specific reasons and for time periods appropriate to the circumstances. This is most common in a company termination as a part of a severance offer used to ensure the employee will not file a suit against the company and won't bad mouth the company. Vesting options are intended to create incentives to a valuable company to stay. Accelerating vesting creates the counter incentive to leave earlier. Of course, if the person is already resigning you the golden handcuffs already aren't working. So what would you hope to achieve by rewarding the person resigning? Again it makes most sense as part of an agreement that the employee not sue the company, that they don't badmouth the company, that they don't compete with the company, or that they provide ongoing assistance in some way (e.g completing patents in prosecution, etc.) Scott McGregor, mcgregor94086@me.com, (408) 505-4123 Sent from my iPhone

Chris Copple Chief Operating Officer & Executive Vice President at ETX Pharma, Inc.

April 3rd, 2016

To clarify, you are likely right for IT startups but I do biotech/pharma and often founders have a couple of years in before they even get angel money let alone venture money. So, the issue of vesting founders shares is long past. Nevertheless, Employment Agreements and Severance Agreements are great tools to manage the abandonment risk. C2

Rob Kornblum

April 3rd, 2016

In tech, founder vesting is always applied when the investor enters the picture.

If founders have had no vesting, the VCs will make them vest their "owned" stock. If founders have had vesting since the beginning, but there is only a limited period of time left on the vesting schedule, the VCs will reset the vesting clock on some or all of their stock.

The VCs want/demand protection with vesting from the point at which they enter.

Rob Kornblum

April 3rd, 2016

I agree with Neil that it is a mixed bag and that there generally are not norms for this.

Remember that the protection that the investor gets through vesting of founder shares can also protect you if you find yourself needing to fire a co-founder. You wouldn't want them to walk away with 100% of their equity.

I totally disagree with Chris Copple. Founder's shares are almost always vested over time. This is to protect all of the founders from one founder walking away but keeping equity.