February 22, 2022 by Clawdia
What if your Co-founder Leaves?
The business honeymoon is over and your partner wants to quit. What now?
If you built your start-up with co-founders, it’s quite likely that they were your childhood friends or you graduated together from the same college.
Founding a startup with people we already know has many advantages. This is mainly because we trust them, know their strong suits inside-out, feel comfortable around them, and know they are dedicated and hard-working individuals.
Cool! It’s really exciting to build a new start-up together.
Yet, alas! Life is dynamic. There is a possibility that what suits your co-founders today would not suit them after the excitement of the “honeymoon” phase is over. Yes, there are plenty of legitimate reasons why any of the co-founders might decide to quit. Just to name a few:
- Having trouble monetizing the startup or attracting investments.
- An attractive alternative that is guaranteed to pay well
- Insufficient motivation
- A startup rollercoaster ride is too much to handle emotionally
- and many more possible reasons Á
Assume further that you are 3 enthusiastic co-founders who allocated your shares equally among yourselves when you first started the company. But 6 months after the startup’s launch, one of the founders decides to quit.
In this case, does a co-founder keep their stock portfolio when they leave?
If they do, then as the startup develops, grows, and increases in value, they may continue to enjoy their share without having to lift a finger, while you do all the hard work for them.
It doesn’t really make sense, does it?
It’s just wrong if a co-founder continues to hold and benefit from equity without actually being involved in the business.
So, how can you adequately and accurately solve this dilemma?
Vesting is an essential mechanism in such situations. Having it in place is important if your startup has two co-founders or more.
How does it work?
The original shares allocated to each co-founder are subject to possible re-purchasing by the company – at an essentially zero cost – if a co-founder decides to leave.
This privilege is valid for any bunch of shares that have not yet been released from the right to be re-purchased by the company over a predetermined period of time of your choice.
That way, as time passes, the relative part of the sum of shares that is being subjected to the right to repurchase decreases, according to the dedication of the co-founder to the project over the period of time that you originally set. Furthermore, the first quarter of shares ripens and becomes unavailable for re-purchase only after a year, aka as Cliff Vesting.
Let’s examine a specific scenario, shall we?
A certain co-founder was allocated 120,000 shares. A Vesting system is in place, and the predetermined period of time was set to 4 years, with a cliff period of 1 year.
- 30,000 of their shares will be released from the right to repurchase after 12 months.
- The remaining 90,000 shares will be spread over a course of 3 years. Now, 7,500 shares will become free from the right to repurchase at the beginning of every quarter (7,500 X 4 quarters = 30,000 shares per year)
That way, after a period of 4 years, during which the co-founder faithfully fulfilled their duties, their whole share of the company will be completely free from the option of being re-purchased by the company.
Vesting is also designed for dynamic or complex situations such as when a board of directors decides a co-founder has not lived up to expectations or has not performed as expected, and is no longer qualified as a co-founder.
In either case, the Vesting mechanism is used to make sure every co-founder is dedicated to the company and earns their shares fairly.
Have any questions about Vesting? Interested in knowing and learning more? Feel free to email me at email@example.com
Yours with care,
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