Note: This is a NextWeb guest post by Güimar Vaca Sittic, a two time Internet entrepreneur currently working at Quasar Ventures based in Buenos Aires, and a Startup Chile Judge. He is a graduate from The University of Chicago and former Director of TEDxUChicago.
Being an entrepreneur is all about enthusiasm and energy. However, this enthusiasm might lead you to make costly rookie mistakes.
You have an awesome idea and a great co-founder with whom you want to work. Both of you work hard for the first couple of months until your partner decides to walk away for any reason. You really believe in this idea and keep working hard for more time until things start to work out and you sell your company for a whopping 200 million dollars.
Next morning your phone rings. It’s your old partner asking for his $100 million because of the 50% you had agreed when both of you founded the company. Wait! What?
An exit does not only mean to sell your company, it is also the sign hanging on top of the door through which your partners can walk away with your equity. If things like this happen, they can really jeopardize the possibilities of success of the company. This is why vesting is so important.
Investing in vesting
Vesting means that at the very beginning each founder gets his or her full package of stocks at once to avoid getting taxed for capital gains; but, the company has the right to purchase a percentage of the founder’s equity in case he or she walks away. This means that if your partner walks away after a couple of months, he or she will not be able to claim those 100 million dollars because the company purchased his or her equity when he or she left the company. In essence, vesting protects founders from each other and aligns incentives so everybody focuses towards a common goal: building a successful company.
Standard vesting clauses typically last four years and have a one year ‘cliff’. This means that if you had 50% equity and leave after two years you will only retain 25%. The longer you stay, …