Stock Related Agreements For Founders
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.
Today, we’re going to do a deep dive into stock-related agreements for your company’s founding team. It’s common for founders to assume that they can own shares in their company on a handshake deal, or simply through sweat equity. The reality is that once a company hits the fundraising stage, investors expect to see stock related agreements in place for founders. When it comes to these agreements, most of the questions are centered around vesting.
The firm has a lot of vesting videos which you can check out here on topics such as how vesting works, whether founders should pay for shares, and 86b elections. Check out the founder vesting series here.
Once a founder determines they should be subject to vesting, the questions becomes, what should vesting look like in founder stock agreements? For a long time, the standard was a four-year vesting term with a one-year cliff. After the first year, 25% of the shares subject to the grant agreement would be fully vested, meaning that the company can’t repurchase their shares from someone who has ended their employment with the company. The remaining 75% would vest in equal monthly installments over three years. Founders can use this as a base-line for their vesting schedule and alter it based on their needs. Working with advisors can also help a founder determine what vesting schedule to use.
Another common questions related to founder stock agreements involves accelerated vesting. In many cases, there can be a double-trigger acceleration clause. This clause explains the situations in which someone would be fully released from all their vesting provisions in their stock grant agreement with the company. This can happen through a change in control or some other kind of exit event of the company. This situation also comes up after an employee is let go after some time, or leaves for good reason, within a designated period after the change of control. Nevertheless, each of these situations highlights how the double-trigger acceleration clause can allow someone to be relieved of their vesting provisions.
These days, most angel investors and venture capital investors are a little more lenient in how they allow founders to set up vesting. They see everything—from two-year vesting schedules to three-year vesting schedules. However, invariably in those cases of two and three years, those companies are well beyond what would be considered a pre-seed or seed stage (meaning they generate upwards of $1,000,000 in revenue). Founders with shorter vesting schedules may have put a substantial amount of their own capital at risk before they’re even raising funds.
All of that being said, many investors still want to see four-year vesting schedules in place. They are usually comfortable with giving some credit for the time you’ve already spent on the company before they enter the picture. Although, it’s not totally out of the realm of imagination that an investor will want you vested for four years from the date of their investment. While the 4 year vesting schedule use to be standard, investors have started to give founders more wiggle room. If you have any more questions about vesting, feel free to contact us.
Until next time—
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.
Today, we’re going to do a deep dive into stock-related agreements for your company’s founding team. It’s common for founders to assume that they can own shares in their company on a handshake deal, or simply through sweat equity. The reality is that once a company hits the fundraising stage, investors expect to see stock related agreements in place for founders. When it comes to these agreements, most of the questions are centered around vesting.
The firm has a lot of vesting videos which you can check out here on topics such as how vesting works, whether founders should pay for shares, and 86b elections. Check out the founder vesting series here.
Once a founder determines they should be subject to vesting, the questions becomes, what should vesting look like in founder stock agreements? For a long time, the standard was a four-year vesting term with a one-year cliff. After the first year, 25% of the shares subject to the grant agreement would be fully vested, meaning that the company can’t repurchase their shares from someone who has ended their employment with the company. The remaining 75% would vest in equal monthly installments over three years. Founders can use this as a base-line for their vesting schedule and alter it based on their needs. Working with advisors can also help a founder determine what vesting schedule to use.
Another common questions related to founder stock agreements involves accelerated vesting. In many cases, there can be a double-trigger acceleration clause. This clause explains the situations in which someone would be fully released from all their vesting provisions in their stock grant agreement with the company. This can happen through a change in control or some other kind of exit event of the company. This situation also comes up after an employee is let go after some time, or leaves for good reason, within a designated period after the change of control. Nevertheless, each of these situations highlights how the double-trigger acceleration clause can allow someone to be relieved of their vesting provisions.
These days, most angel investors and venture capital investors are a little more lenient in how they allow founders to set up vesting. They see everything—from two-year vesting schedules to three-year vesting schedules. However, invariably in those cases of two and three years, those companies are well beyond what would be considered a pre-seed or seed stage (meaning they generate upwards of $1,000,000 in revenue). Founders with shorter vesting schedules may have put a substantial amount of their own capital at risk before they’re even raising funds.
All of that being said, many investors still want to see four-year vesting schedules in place. They are usually comfortable with giving some credit for the time you’ve already spent on the company before they enter the picture. Although, it’s not totally out of the realm of imagination that an investor will want you vested for four years from the date of their investment. While the 4 year vesting schedule use to be standard, investors have started to give founders more wiggle room. If you have any more questions about vesting, feel free to contact us.
Until next time—
