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1.How to negotiate your vesting terms and conditions?[Original Blog]
Negotiating vesting is an important and often overlooked aspect of joining or founding a startup. Vesting is the process by which you earn ownership of your shares over time, usually subject to certain conditions such as staying with the company or meeting performance goals. Vesting terms and conditions can vary widely depending on the stage, size, and culture of the startup, as well as your role and contribution. Therefore, it is essential to understand and negotiate your vesting terms and conditions before you sign any agreement. In this section, we will cover some of the key points to consider when negotiating your vesting, from both the founder's and the employee's perspective. We will also provide some examples of common vesting scenarios and how to deal with them.
Some of the main aspects of vesting that you should pay attention to are:
1. The vesting schedule: This is the timeline that determines how and when you will receive your shares. A typical vesting schedule for startups is four years, with a one-year cliff and monthly vesting thereafter. This means that you will not receive any shares until you complete one year of service, and then you will receive 1/48th of your total shares every month until you reach four years. However, some startups may offer shorter or longer vesting periods, or different vesting frequencies, such as quarterly or annually. You should negotiate a vesting schedule that aligns with your expectations and goals, and that reflects your value and commitment to the company.
2. The vesting trigger: This is the event or condition that initiates or accelerates your vesting. The most common vesting trigger is your continued employment or service with the company. However, there may be other vesting triggers, such as achieving certain milestones, raising a certain amount of funding, or reaching a certain valuation. Some startups may also include a vesting acceleration clause, which allows you to vest all or a portion of your shares upon certain events, such as a change of control or a termination without cause. You should negotiate a vesting trigger that protects your interests and incentivizes your performance, and that is fair and reasonable for both parties.
3. The vesting percentage: This is the amount of shares that you are entitled to vest over time. The vesting percentage is usually determined by your role, seniority, and contribution to the company. For founders, the vesting percentage is usually equal to their ownership stake in the company, which is usually divided equally among co-founders, unless there are special circumstances. For employees, the vesting percentage is usually based on their position, experience, and market value. You should negotiate a vesting percentage that reflects your worth and potential, and that is competitive and attractive for your industry and stage.
4. The vesting price: This is the price that you have to pay to exercise your vested shares. The vesting price is usually set by the fair market value of the shares at the time of the grant, which is determined by an independent valuation or an appraisal. However, some startups may offer discounted or preferential vesting prices, especially for early-stage employees or key hires. You should negotiate a vesting price that is affordable and favorable for you, and that is consistent and transparent for the company.
Some examples of vesting scenarios and how to negotiate them are:
- You are a co-founder of a pre-seed startup: As a co-founder, you should aim for a vesting schedule that is long enough to demonstrate your commitment and alignment with the company's vision, but short enough to allow you to reap the rewards of your hard work and risk. A four-year vesting schedule with a one-year cliff is a common and reasonable choice for co-founders. However, you may want to negotiate for a shorter vesting period or a lower cliff if you have already invested a lot of time, money, or resources into the startup, or if you have a proven track record or a unique skill set. You should also negotiate for a vesting trigger that is based on your continued involvement and contribution to the company, rather than on external factors that are beyond your control. For example, you may want to include a vesting acceleration clause that allows you to vest all or a portion of your shares if the company is acquired or if you are forced out by the board or the investors. You should also negotiate for a vesting percentage that is equal to your ownership stake in the company, which is usually divided equally among co-founders, unless there are special circumstances that justify a different allocation. For example, you may want to adjust your vesting percentage based on your relative contribution, experience, or responsibility, or based on your personal or financial situation. You should also negotiate for a vesting price that is nominal or zero, since you are not buying the shares, but rather earning them through your sweat equity.
- You are an early employee of a seed-stage startup: As an early employee, you should aim for a vesting schedule that is aligned with the company's growth and milestones, but also flexible enough to accommodate your personal and professional goals. A four-year vesting schedule with a one-year cliff is a standard and acceptable choice for early employees, but you may want to negotiate for a shorter vesting period or a lower cliff if you have a high impact or a high demand role, or if you have a strong relationship or a prior history with the founders or the company. You should also negotiate for a vesting trigger that is based on your continued employment or service with the company, but also includes some protection and incentive for you in case of unforeseen events. For example, you may want to include a vesting acceleration clause that allows you to vest all or a portion of your shares if the company is acquired or if you are terminated without cause. You should also negotiate for a vesting percentage that is competitive and attractive for your position, experience, and market value, and that is consistent and transparent for the company. For example, you may want to benchmark your vesting percentage against similar roles and stages in your industry, or against the company's cap table and valuation. You should also negotiate for a vesting price that is affordable and favorable for you, and that is based on the fair market value of the shares at the time of the grant. However, you may want to negotiate for a discounted or preferential vesting price, especially if you are joining the company at a very early stage or at a very low valuation, or if you are taking a significant pay cut or giving up other benefits or opportunities.
How to negotiate your vesting terms and conditions - Vesting: What it is and how it works for founders and employees