Conventions around vesting for founders and early employees who receive big chunks of equity (eg more than ~5% of fully diluted shares outstanding) need to be updated. Founders are normally subject to traditional vesting cycles: monthly over four years with a one-year cliff. There are many reasons why founders like this, namely that they have a predictable time frame to fully vest which seems reasonable when starting a company. But there’s a strong argument that this isn’t in their best interest, especially when they have co-founders.
Too many times I have seen founders who have slogged through nearly a decade of company building resent the fact that a big piece of their cap table sits with co-founders who departed the company before things really started working. They are sad that they bailed when things got tough, or that they simply lost interest immediately after fully vesting and moved on to the next thing. And they’re particularly frustrated that they and their leadership team own less of the company they worked so hard to build because they chose to spread their equity across people who wouldn’t participate in the full ride. This happens more often than not – it’s the rule, not the exception.
To hedge against this predictable outcome, more founders should adopt longer vesting cycles for themselves and the earliest (big equity) employees. Stretching things out to a six-year vest helps to prevent co-founder abandonment. Equally important, it also protects you if your co-founders aren’t the right fit early on – you don’t want someone leaving two years into building your company with the lion’s share of the cap table. That sucks for everyone. Another construct I like is a four-year cycle where vesting is backloaded (e.g. 10% after year 1, 20% after year 2, 30% after year 3, and 40% after year 4). Longer vesting cycles also align founders with investors who are committing to the company and team. I recently learned of a firm asking founders to stretch out their vesting schedule for their unvested shares when leading a round. I like this, and while some founders may view this as unnecessary, it is a good thing. Incentive alignment is powerful.
Some people may argue that by starting or joining something very early stage they are assuming a lot of risk and therefore should receive a lot of the upside. The fact of the matter is that it usually takes many years for something to click, and by the time they normally do the teams that are in place can look quite different. Do people who were there early when things weren’t working and subsequently left deserve meaningfully more than those who buckled down and willed the thing to product-market fit and scale? I don’t think so. People should be rewarded for making something work, and that usually means being there for when it works. Being granted a meaningful amount of equity is not an entitlement, it is something that should be continuously earned over time. Stretching out the vesting schedule helps to level the playing field for the people there today, and for those to come in the future.