Should founders stock be subject to vesting before a venture financing?

July 18, 2007

Generally yes.  Even though the founders stock is issued and outstanding, the company can have the right to repurchase the shares.  The right of the company to repurchase the shares will lapse over time or upon certain events, similar to vesting of options.  There are two primary reasons for subjecting founders stock to vesting even before a venture financing.

1.  If there is more than one founder, then each of the founders should want the company to be able to repurchase the unvested shares if one of the founders leaves.

2. If the terms of founder vesting are reasonable, there is some chance that the terms of the founder vesting may survive the venture financing.

Comments

  • David Thomas

    A key to remember if service-based vesting will be imposed up on the founder stock is that the tax rules provide that it is taxable at vesting on the value of the stock at the time of vesting. These rules will be overridden if the founder elects within 30 days of the issuance of the founder stock to be taxed on the value of the stock at the time of issuance (less anything paid for the stock, which can include the value of IP contributed to the business) [this is an "83(b) election"]. The 30 day limit is extremely strict and the 83(b) election has to be filed with the IRS within that 30 day period, so if service-based vesting will be imposed, it is important to be very careful to consider making an 83(b) election and filing it with the IRS within the deadline.

  • http://www.heresmyoffer.com Steven Walline

    I conceived this idea but don’t know if it’s feasible.I’m looking to raise $240,000 by selling 24% of the company.I would reserve the option to buy half of it back within 3 yrs at triple the purchase price.If you have questions please email me at
    stecur@heresmyoffer.com. Thanks in advance for any imput.

  • http://www.startupcompanylawyer.com Yokum

    Capping half of an investor’s return at 3x doesn’t seem like an attractive proposition to an investor. If the investor has the ability to “put” or force the founder to buy the shares to guarantee a minimum 3x return, that would be much more attractive. This is no where close to being a typical funding structure for a startup company that is looking to raise venture capital. That being said, if you can pull it off, good luck.

  • Steve

    Do you see any issues with writing terms into a Founder's shareholder agreement (in Company X) where one of the parties is a different Company (say Company Y) and it writes into the agreement that they will transfer some of it's founder's shares to it's own employees on certain milestones. An example would be if said employees of Company Y were to be hired by Company X let's say on a significant funding event.

  • http://www.startupcompanylawyer.com Yokum

    @Steve – Transfer of shares for no value will be taxable income or gifts depending on the situation. In addition, most investors will not like these arrangements as they are atypical.

  • http://www.startupcompanylawyer.com Yokum

    @Steve – Transfer of shares for no value will be taxable income or gifts depending on the situation. In addition, most investors will not like these arrangements as they are atypical.