Why Vest Founders’ Equity?

When you start a company and raise outside money, your investors will always ask that your equity be vested over time.  Some founders are insulted by this, and it’s understandable. You work on an idea, and suddenly, your equity is subject to a vesting schedule (what’s common is a four-year period).

So, what gives? Investors ask for this because it’s good for the company and it actually protects the founders. For example, employee stock options are vested. It’s very powerful if the founders also are in the same boat with their employees.

Also, when there are multiple founders, vesting protects them from each other. For example, I know of a start-up that two serial entrepreneurs co-founded. It was their second company together, and the first was very successful. There was very little vesting for the founders in their second company. The logic? They knew each other well already.

A year in, one of the founders quit. He sailed around the world. He walked away with a big chunk of the company. The second founder hung in there and worked many years to get the start-up to a modest exit. He was angry. The two no longer do business. It would have been great if a piece of that equity instead could be given to those still at the company.

So, vesting is standard. It sounds like a terrible term, but it really is best for founders and the company.

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