Comments on: What should the vesting terms of founder stock be before a venture financing?

By: Yokum

Yokum — Mon, 16 Nov 2009 08:13:59 +0000

@newtonprep – don't understand exactly what you question is.

By: Yokum

Yokum — Mon, 16 Nov 2009 01:13:59 +0000

@newtonprep – don't understand exactly what you question is.

By: newtonprep

newtonprep — Tue, 10 Nov 2009 20:19:43 +0000

What are strengthens and pitfalls of this example: The Jewel Company is a C status corporation; incorporated in the State of Florida on June 1, 2009. Initially, it authorized 20,000,000 shares of common stock as indicated in its Articles of Incorporation. On November 9th, 2009, its Board of Directors approved the issuance of 4,000,000 shares [representing 20%of its class “A” (one vote per share) stocks]. In addition, the Board of Directors approved the issuance of 2,650,000 shares of its class “A” stock and 800,000 of its Class “B” stock (carrying voting privileges of 20 votes per share) to its Founder. 40% of the Founder’s Class A shares is vested at the end of the first year following such issuance, with the remaining 60% to vest monthly over the next three years. The unvested shares are fully vested in the event of a merger or acquisition if the Founder is terminated without “cause” by the acquiring entity within one year.

By: Yokum

Yokum — Wed, 26 Nov 2008 20:44:03 +0000

@tia – The founders would enter into a stock restriction agreement that subjects the already issued shares to a repurchase right in favor of the company that lapses over time as the stock vests. Founders would NOT be granted additional shares subject to vesting.

By: tia

tia — Wed, 26 Nov 2008 14:52:01 +0000

Hi Yokum,

In a situation where founders own common stock shares not subject to vesting and there is a contemplated subsequent Series A round, how will the Series A investors impose vesting? I assume they would have to provide the founders options to purchase additional shares that are subject to a vesting schedule?

By: Yokum

Yokum — Tue, 19 Aug 2008 07:05:29 +0000

@Newfounder – when a founder leaves, his unvested shares are repurchased by the company. Typically if the shares are not repurchased, they are released from the repurchase option (i.e. are fully vested). Vesting depends on continued services. There is no “handcuff” for someone that is no longer a service provider. Thus, I don’t understand the question. With respect to currently employed founders, if one of them doesn’t agree to the revised vesting terms from the VC, the VC may not invest.

Also, if you have received a Series A term sheet, congratulations.

By: newfounder

newfounder — Mon, 18 Aug 2008 14:39:58 +0000

one more follow up question:
what about another term sheet that has better financial terms for company but requires founder’s shares to be 0% vested at close? What happens to previously vested, non-active founder’s shares? Is this simply to be negotiated with VC or does the original founder have legal rights to previously vested shares?

thanks

By: newfounder

newfounder — Mon, 18 Aug 2008 14:36:38 +0000

Hi Yokum
We have been working for 2 years and have just received a series A term sheet. We had all agreed that our founder’s shares vested over 4 years from the start of the company. However, if an original founder recently left the company voluntarily after 2 years of work, but prior to the series A financing, what legal recourse does the original founder have if the series A investors impose 25% vesting at closing for all founder’s? I am certain that this founder still expects full 50% of vested founder’s shares. Do all founder share rignts go out the door when a term sheet is accepted by current managing founder’s?

thanks

By: Yokum

Yokum — Thu, 31 Jul 2008 05:44:40 +0000

@Bill,

1. To repeat, venture funds cannot/will not invest in LLCs. Because an LLC is a flow through entity, operating income will pass through the LLC to the fund and create unrelated business taxable income. In addition, mimicking the rights preferred stock and creating the equivalent of an option plan in an LLC is too difficult.

3. If a founder puts in enough money to buy a new luxury car (i.e. an arguably painful amount of money), then I think that issuing a junior preferred stock with a simple liquidation preference to a founder might be appropriate.

By: Bill Mc.

Bill Mc. — Thu, 31 Jul 2008 01:15:36 +0000

Yokum, thanks much for your earlier post.

Couple of follow-ups:

Your assertion that VCs avoid investments in LLCs corresponds with what I have heard elsewhere.

1. That being said, have you seen VCs invest for a stake in a c-corp when the remaining equity in the c-corp is then held by an LLC?

2. If so, did any factor drive the VCs comfort with the structure?

3. Just to drill down further, how often roughly is the “occassionally” you wrote that you have seen a founder “liquidation preference” vs. her co-founders? What might constitute the “substantial” amount of money you cite?