Supplementary questions. Brad Feld’s excellent article on vesting equates vesting to an alignment tool. Does this/can this also apply to the equity purchased by seed investors? Also, assuming I do get to keep my stock, should I expect to have a share in the option pool – vesting as appropriate – to incent me going forwards?

Thomas

If you are fully vested and/or your current options are not worth much, and you have leverage, you can ask the company to incent you with new options. And, as you said, it looks like you may be getting some new options anyway.

The company is unlikely to compensate you further for time served. People are only generally going to incent you for your future work. That said, the worthlessness of your existing options can be part of your discussion, the fact that you have not been compensated for your past contributions, the fact that you are not incented to make your past options worth more through continuing work since they are already so worthless.

The other thing to consider is whether everyone in the company has gone through what you have. You may be getting the same deal as everyone else; in that case it is tough to justify special treatment. But if some people are getting special deals you can justify right-sizing.

We hope to do some “Employee Hacks” in the future.

How about if you are not a founder, but an “old timer” at a company.

When I started 5 years ago, they gave me options. The company went through N number of financings , the options were reverse-split 10 to 1, and then some. So now they are pretty much worthless.

The company is an very good shape right now, and there is yet another “strategic” round of financing going on after which we are supposedly going to get a new option plan.

I am just curious – is there a way for us, “old timers”, to get them all vested (or at leat 2-3 years) for the time “served”?
Or what are our other options as far as getting a fair share?

It would be great if you shared some of your thoughts in articles geared towards employees of start-ups.

Regards.

You could argue that the acquirers will find this a problem, but they could add a retention bonus. That will usually reduce the share price on exit since it comes off the top, and that reduces VC share price (all from Feld’s blog).

But isn’t this a better way (retention bonus rather than partial or no acceleration) to compensate founders for the risk taken? After all, the VC gets paid immediately…

In my first institutional round we successfully got founder vesting put in (repurchase rights), with a year’s worth of credit and a monthly vesting rather than an annual cliff. The company was at about 16 months old. At the time, we thought we were losers and just got ripped off but in hindsight that was a genius move. When the lead VC moved to poke out two of our 3 co-founders, that vesting took away some of the sting. Having the repurchase rights makes them think twice about having to spend the cash to move you out. In the end, we ended up with about 12% of the company fully diluted per founder. That’s pretty damn good, especially when we were at a $650M valuation when we got poked out.

If you are EBITDA negative, you need to expect to see this in the deal. I would highly encourage you to try and fight for the value you’ve created as much as possible and look down the road at ways in which you can preserve as much of that value as possible. If you are close to break even or EBITDA positive, this should be a non-issue.

If I was Jeremy, I’d look more for a recap of the company to take some value off of the table before I’d consider bringing in someone to dilute me and ask for revesting.

This was the first time I experienced something so egregious.

Vesting is a good thing for multiple co-founders. You never know when a co-founder might need to walk out the door for reasons beyond his control. I’m probably not telling you anything you don’t already know.

I can’t imagine that your Series B investors won’t ask for vesting terms.

You have some good ideas and some factual errors. I like your concept of “consideration for putting shares in jeopardy.”

Pre-money valuations are usually presented on a fully-diluted-basis. That means the pre-money includes all existing options and shares as if they are fully vested. (An earlier hack addressed the inclusion of a new option in the pre-money valuation.)

Like Naval said, vesting agreements for a founder are typically structured as the lapsing of the company’s right to purchase those shares from the founder. The founder technically continues to own the shares even though they are vesting. That means the founder can vote those shares even if they are not vested. (By the way, shares that have been exercised but are unvested can also be voted. For example, some option agreements allow employees to exercise their shares before they are vested due for various tax benefits.)

Your statement that “No reputable VC will ask you to vest you shares” is wrong. Every reputable and unreputable VC will ask you to vest your shares. It will almost certainly be a deal-breaker for them if you refuse.

I’d be interested in future posts about vesting requirements in a Series B. For example, if I raise a large Series B in January 2008 with 2-3 VC’s, are they likely to insist on vesting terms for the founders? The company will be less than two years old at that point.