Meaning
Equity distribution structures that require founders to earn their shares over a set period of time protect the company from early departures. In many venture-backed startups, a founder re-vesting schedule is implemented when new investors provide funding. This mechanism ensures that if a partner leaves the company early, their unearned shares are returned to the business.
It aligns the long-term commitment of the founders with the expectations of the investors.
Equity Protection
Investors use these structures to mitigate the risk of a founder leaving with a large chunk of the company’s equity. If a founder re-vesting schedule is in place, the shares are earned monthly or quarterly over a few years. This arrangement ensures that the equity remains with the people who are actively building the business.
It also provides a way to redistribute shares to new hires if a founder does depart.
Contractual Details
Negotiating the terms of these schedules is a key part of the investment process. A founder re-vesting schedule often includes a cliff, which is a period during which no shares are earned, followed by regular vesting. The agreement may also include acceleration clauses that grant full ownership of the shares if the company is acquired.
These details must be carefully negotiated to protect the interests of both the founders and the investors.
Vesting Acceleration
Milestones can also trigger the earning of shares in some agreements. While a founder re-vesting schedule is usually time-based, it can be tied to specific performance goals. This dual approach ensures that the equity is earned through both time and achievement.
