Startup Confessionals: Combat the Awkward Convos around Vesting
There is a time when the idea becomes more than just a fragment in your imagination, and pen hits paper. When the team starts amalgamating and there is more interest in pushing the venture forward, usually, the next stop is the founder’s agreement.
A founder’s agreement is like your marriage contract for your team and business. Startups.com says, “ A founders agreement is a legal contract that a startup’s founders enter into. It can cover everything from who’s involved, how much they’ll contribute, roles and responsibilities of all cofounders equity ownership, legal services, to what happens if someone leaves.”
How I would explain it in my business coaching sessions is that this is the document that puts your business’s interests in front of your own, and it is the way to plan for the worst while hoping for the best.
Frankly, it’s your startup’s prenup.
A common snag in this document is the question of vesting. Vesting is, as Synvest Capital states, “a process by which you “earn” your stock over a period of time depending on your performance and commitment to the startup.” Instead of gaining all of your equity when you sign a founder’s agreement, it is released to you over a duration of time.
Then I usually get asked:
Why should we have a vesting schedule?
As someone who cofounded their own business, I am a firm believer in having a vesting schedule, but I try not to let that get in the way of the answer.
There are practical and logical reasons to have this safety net in your founder’s agreement:
1. It protects your business.
When a venture idea becomes a real, registered business with shares and a founder’s agreement, it goes from being worth Monopoly money to cold hard cash. (Even if it’s only pennies at the moment.)
When this transition happens, your business becomes its own entity. I use the analogy of having a baby. Your startup is in a bassinette looking up at you, and it has its own hopes, dreams, and growing pains to go through. Now it is your — the cofounding team’s — responsibility to put aside personal agendas and do what is best for the venture. You are all parents and step parents of this wonderfully messy baby.
Much like a parent would do anything to protect a child, your team must put the interest of the venture above your own. Vesting is a layer of protection for your venture that gives the assurance that those parents and step parents looking after it.
2. It gives you security.
As a founder, you want to know that your team will be with you through the highs and lows of startuphood. Vesting gives you a steady stream of equity that unfolds over time, so you will have the additionally protection of the vesting schedule.
If someone leaves, they will be penalized, and staying allows the critical teammates to reap the benefits of their hard work.
It is truly an incentive for them — and you — to stay in the grind of it.
3. It provides structure to your expectations
In the beginning, it is fun to bounce ideas around the bar and to start drafting up MVPs. But as the mundanity grows and the ideation honeymoon wears off, you will need to understand what is expected of every team member.
The founder’s agreement is like the golden ticket you wish you had in those college group projects where one person rode their way to a good grade off the back of your work.
Vesting and the agreement sets the expectations in writing for every member of the team, and the terms and conditions for their equity. I.E, you will not get rewarded with equity if you do not do the work.
4. It will allow your investors to sleep at night.
Early stage investors are putting money in the team before they see or harvest the rewards of the product. They want to know that the team they have invested in will be there to see the iterations, heartbreaks, and highs through until the end. Their payout is based more on the team and their commitment in these early days, so give them peace of mind when they put their personal or venture capital in you.
Though a founder’s agreement can bring up awkward feelings or fleeting moments of tension, it is crucial to have the hard conversations first before building any product or service. If you are like me, have a nice dinner with your team, and set aside your emotions to discuss the future of the business.
For more conversations like these, give me a follow and be sure to check out the Start Up Authentically podcast this April wherever you listen to podcasts.