Stock Related Agreements: Negotiating Founder Vesting Provisions
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
When a founder is negotiating vesting provisions in stock-related documents, there are plenty of questions to consider. One of the most commonly negotiated concepts is what constitutes “cause” and what constitutes “good reason” in the event that an employee or founder is fired or leaves the company. These concepts relate to If an employee or founder leaves for good reason, or is fired without cause, they will accelerate.
There are two things you need to keep track of to prevent the acceleration of vesting.
- A strict a definition of cause as you can possibly have.
- A loose of a definition of good reason.
When a founder is negotiating with a venture capitalist, it is natural for him/her to want to get the best deal possible. However, founders wear multiple hats and it is important to be cognizant of the fact that other executives within the company are going to also try to negotiate the same way. Founders must examine where their loyalties lie. Are they with the company or are they trying to maximize personal gain? Is the founder pitting themself against the company and the venture capitalists if things go wrong?
When founders lean too heavily into negotiating for themselves, they can lose sight if what’s best for the company. “In my own experience, I find that the more a founder is trying to negotiate purely with his/her own self-interest against everyone else involved with the company, the less successful they tend to be,” cautions Mark Graffagnini, Managing Partner of Cara Stone, LLP and Partner in Callais Capital Ventures. “Other people may have different data points, but I believe there’s a strong connection between the two. I think you need to strike a balance between what you would find acceptable if you were an employee of another company and what you would find to be acceptable as possibly the largest shareholder of your own company. Think about how the person with a board seat and the most powerful board member of your company would align themselves. The way you negotiate things like cause and good reason may be used by other employees that are invariable in the company’s future success. I think it can be dangerous for a founder to set a bad precedent. It might not only turn off potential investors, but it might also cause problems for the company down the road if people aren’t working in the company’s best interest.”
So, that’s a bit of food for thought when it comes to negotiating vesting provisions. Stay tuned as we continue our blog series analyzing stock agreements for businesses!
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
When a founder is negotiating vesting provisions in stock-related documents, there are plenty of questions to consider. One of the most commonly negotiated concepts is what constitutes “cause” and what constitutes “good reason” in the event that an employee or founder is fired or leaves the company. These concepts relate to If an employee or founder leaves for good reason, or is fired without cause, they will accelerate.
There are two things you need to keep track of to prevent the acceleration of vesting.
- A strict a definition of cause as you can possibly have.
- A loose of a definition of good reason.
When a founder is negotiating with a venture capitalist, it is natural for him/her to want to get the best deal possible. However, founders wear multiple hats and it is important to be cognizant of the fact that other executives within the company are going to also try to negotiate the same way. Founders must examine where their loyalties lie. Are they with the company or are they trying to maximize personal gain? Is the founder pitting themself against the company and the venture capitalists if things go wrong?
When founders lean too heavily into negotiating for themselves, they can lose sight if what’s best for the company. “In my own experience, I find that the more a founder is trying to negotiate purely with his/her own self-interest against everyone else involved with the company, the less successful they tend to be,” cautions Mark Graffagnini, Managing Partner of Cara Stone, LLP and Partner in Callais Capital Ventures. “Other people may have different data points, but I believe there’s a strong connection between the two. I think you need to strike a balance between what you would find acceptable if you were an employee of another company and what you would find to be acceptable as possibly the largest shareholder of your own company. Think about how the person with a board seat and the most powerful board member of your company would align themselves. The way you negotiate things like cause and good reason may be used by other employees that are invariable in the company’s future success. I think it can be dangerous for a founder to set a bad precedent. It might not only turn off potential investors, but it might also cause problems for the company down the road if people aren’t working in the company’s best interest.”
So, that’s a bit of food for thought when it comes to negotiating vesting provisions. Stay tuned as we continue our blog series analyzing stock agreements for businesses!
