Didn't even realize founder's equity vested. I thought since they created the company, they owned it since day 1.
Founders outright own the company in the period between creating the C Corp through taking safes, if any, until taking a priced round.
Depending on the progress at that point, you may or may not get asked to revest. In our case, we negotiated with our VC that our vesting period started on incorporation. However, we were funded within 6 months of incorporation. If that period were to be years, it would be extremely reasonable for a VC to demand revesting, and to the benefit of multiple founders IMO.
[1] Earlier thread on Cruise where I defended the position that a founder deserved full equity (modulo later dilution) because his cofounder didn’t think to establish a vesting schedule or, failing that, to buy him out: https://news.ycombinator.com/item?id=11741652
Now that we have a fair system set out, there is one important principle. You must have vesting. Preferably 4 or 5 years. Nobody earns their shares until they've stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it's terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there's some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
I made this mistake and will never make it again.
There are often weird cases in startups where you need to negotiate against yourself, and it's going to be hard to convince a disinterested third party that you're acting in an equitable way unless you're putting a framework in place from the beginning to value the sweat equity you're contributing. Having a vesting schedule will give you leverage in the future, even if it doesn't seem like it's doing anything at the time.
If I'm the only one on the cap table and half my equity is not yet vested, who does it belong to if I "leave the company"? And in the event that I run into a bizarre situation like the one you hint at, why can't I just setup vesting at that point?
So that's a moot question. The assumption here is that even if you're currently a solo bootstrapped founder, you still want the optionality to hire people and/or raise money in the future. (Because burning your ships aside, you generally shouldn't give up free options.)
So then you run into issues like figuring out how to compensate yourself for money you've invested in the business. And since most businesses fail, by definition most businesses aren't worth anything after four years. Which means that if some but not all of the team is still working on the business, then you need to figure out how many shares to re-up yourself in the situation that the business isn't worth anything or is worth very little. If there are other people on the cap table at that point who have put work or money into the business then you need to figure out what's the equitable amount of dilution they should take, which is already difficult enough as is and would be even harder to do without having some historical record of vesting over time. This isn't even that uncommon, I've talked with multiple YC companies that have gone through this and who are now on their way toward being successful.
"Solo founder bootstrapped company" sounds to me like "90% of small businesses", and I'm pretty sure virtually none of them have founder vesting, and yet they manage to hire people without the business owner having to vest their shares. Do you just mean in the case where they're going to issue shares to employees? So if I've been running this company for a couple years and I hire someone that I want to compensate with equity (which would be pretty unlikely, given that I think that's generally a crummy deal for both of us), why exactly can't I set them up on a normal vesting schedule?
Similarly, I suspect VCs are perfectly willing to invest in teams where the sole founder didn't previously have vesting setup. Indeed, I'd expect that's nearly always the situation.
So if I want to raise money, why can't we work out a vesting schedule at that point, which I suspect is how it goes 99% of the time that investors want solo founders to setup vesting. They weren't vesting at all before then, because, why would they? Doesn't make any sense.
This seems a bit like buying life insurance when you have no dependents, because you might get married and have kids later. Yeah, so get the life insurance then. In the meantime, who is getting that money if you die?
You can and you'll have to work that out with your investors even if you had a pre-existing vesting schedule. But if you already have a pre-existing vesting schedule then that provides a much stronger anchor for the negotiations rather than just walking in there and saying what you think is fair or waiting for the investor to say what they think is fair. It's the same reason for giving yourself double trigger accelerated vesting in your stock purchase agreement. It doesn't (usually) legally mean anything because it needs to be re-negotiated anyway with the company that's buying you, but it provides an anchor for negotiations.
It also doesn't take any work and doesn't cost anything. And especially at the early stages where a lot of what determines the valuation of your company in an investment scenario is how much time the investors think they're going to need to spend babysitting you, I don't see any downside in erring on the side of running things in a professional way. And if you can show that you're capable of running things in a professional way, people will be more likely to defer to how you want to run the company.
To be honest, I think that if you're a solo bootstrapped startup founder, pre revenue, pre employees, pre investment, then any second you spend on anything other than getting to product market fit is a waste.
I've seen too many companies from the inside that were very proud about how well they had done, and I quote, "their legal homework", before having gotten to anything even vaguely resembling product market fit. None of them are around now.
And to add a personal anecdote: my cofounder and me began a vesting schedule on our first investment (an accelerator), and that went fine.
I think this is fairly common, at least for employer sponsored insurance which is buy within six months of starting or forgo forever because of adverse selection effects.
As for the last part, mine goes to my siblings if I die.
And it wouldn’t make sense to buy life insurance to go to a non-dependent. You’d statistically be better off just paying them the premiums.
That they are YC companies by definition means they are not solo bootstrapped companies, since YC involves raising outside funding (not to mention they aren't made by solo founders).
I agree a vesting schedule is a good idea for all companies, as it makes it easier to bring on more founders or raise outside funding in the future but it's definitely not necessary for a true solo bootstrapped company.
Just because you have an “obvious” path to a sustainable business doesn’t guarantee it will be big enough or fast enough to meet your vision or the demand when you find it.
Not every restaurant starts out selling sandwiches on a food cart.
There are advantages and disadvantages to founder vesting and they are situational. Recommending it as a default may very well be good zeroth order advice for beginners, but your position is way too strong.
A start on thinking about why it might not always be the best way to keep a team together is to look up the "israeli day care study".
Me, I've been working for small companies ("startups") since 1995. I've been on the founding teams of 5 of them. In all but 1 of them, key members of the team left at some point. In each of those situations, lack of vesting would have meant they left with a full share of the company, leaving everyone else on the team to work --- possibly for years --- for that person's equity. In one case, that's exactly what happened, only we didn't know it until the end.
That's a mistake I will never make again.
These are, I think, the very worst kinds of mistakes startup founders can make. The kind that don't really impact the company on a day-to-day basis and that you won't notice, until you're actually successful and finally at or near accounting for that success, and you realize you did something stupid that tolls the whole fucking enterprise. You might not be able to do anything to mitigate, you can't even bail from the company and do something different, you're never getting the time back, the damage is done. Vesting isn't the only mistake like this, and it's not the worst, but it's bad.
And for what? Does it somehow make you feel better not to vest? I don't get it.
(I don't pretend to understand Alex's logic about vesting as a solo founder but did not think hard about it either).
There are good reasons not to do it too. If you work with good and honorable people, who have kept their promises to other people in their life, and who have (incredibly valuable) reputations as honest people to protect, they are pretty likely to keep their promises to you too. (Don't forget to actually discuss these promises!) Unless you unnecessarily move the decision to leave into the category of "rational economic decision" by putting a price on it. (And four years later, when that price has decreased to zero?)
Another reason is that you might trust your cofounders more than your possible future investors (they have reputational incentives too, but you don't know them yet!), and prefer not to give the latter a possible avenue to steal the company from some or all of you.
Sometimes there can be tax tradeoffs, depending on what else you are doing.
As I said, it might be a good choice to have vesting in many or even most circumstances. Everyone should carefully consider it. But "always no matter what" is not good advice.
The idea of starting a company that is predicated on not surviving a founder departure is weird to me.
To give a related example, I've sold a company to an acquirer for whom the deal was extremely material, and for whom I was a very key employee, who tied me down for two years with nothing more or less than a promise and a handshake. They were smart: I was far less likely to leave during that time than I was after another acquisition where I had big golden handcuffs.
(Also, I have trouble understanding the "10 years later" scenario. Is the assumption that there's a founder breakup and... everyone just forgets about it and goes about their business? THAT sounds nuts.)
The "10 years later" example was not made up. Like I said, I've been a party to a "didn't think we needed vesting" scenario, and it's a mistake I won't make again.
I 100% believe you successfully managed a company that was built on handshakes. Like I said, you got lucky (if you'd prefer the alternate framing, say instead "we didn't get unlucky"). I have trouble understanding why you'd leave something like this up to chance; companies are (in most cases) many years worth of dedicated enterprise from multiple people, and deserve a few hours of de-risking by spelling the arrangement amongst principles out in writing.
I'm hardly alone in the belief that founders should vest; you yourself called it a "default"; I quoted Spolsky on it below; and it is, all else aside, certainly a norm in the US. I'm still waiting to hear why you wouldn't do this. Because it helps investors "steal the company" from you? If you raise VC, this debate is especially irrelevant, because while I believe you took funding for one or both of the companies you sold (as I believe all the experiences you relate), I do not believe you could today raise a round from an actual VC firm without taking on a vesting schedule.
Try this:
If standard vesting terms make you nearly indifferent to your co founder leaving, or to being fired, then they are perfect for you and you should definitely go for it.
Otherwise, you want some other kind of agreement with your co founders. It's not likely that the ideal agreement is one you can enforce through the weak economic incentives you can put in your corporate agreements (constrained by enforceability, tax considerations, what would totally freak out later investors or acquirers, etc). You will just have to rely on loyalty, integrity, etc. And it's fairly well known that adding weak but salient economic incentives to strong moral ones has a perverse effect. I don't think I can explain this any more clearly.
(And if you can't completely trust your partners, why worry about them leaving, but not about them colluding to fire you and repurchase a bunch of your stock? And isn't the prospect of a high stakes negotiation that could blow up your company a stronger incentive than losing some predictable fraction of equity?)
No matter what you do, there will be risks. I think what balance of risks is best depends on you, your partners, and your situation. We are in full agreement that you should address this issue, in one way or another, early.
(It hasn't been that long since I've raised money from a "real VC", but who knows? I'm happy to leave that out of the conversation)
Why am I more worried about this situation than the ones where my partners conspire against me to steal my stake in the company? Because the situation I'm describing happens all the time, and, as I mentioned upthread, easily happen even when every party is acting in good faith.
ps
I have a pair of friends who went in on a YC company together. The partnership didn't work out; one left to join and eventually lead another YC company, the other stayed. Both founders had strong, liquidity-event exits afterwards (within months of each other, in fact). Nobody foresaw the partnership failing, but this (super ultra common) eventually was handled by the book, and everyone won in the end. I'm, again, having a hard time seeing the net downside of vesting.
The product went live and was even used by some people. Eventually I ended up in a place where it was clear to me I disagreed with the direction of the business and the CEO leading it. I for one am glad there was a cliff.
Because I left and when I did my co-founders continued to work on that business. As far as I know they’re still at it.
That was over six years ago. The code I wrote is likely of VERY little value in the grand scheme of things.
The value I added in thoughts, ideas, advice etc. is probably about as valuable as people my co-founders have had several dinners with over the years at this point. If I had walked away with 1/3 of the equity that would have put the other two co-founders in a horrible situation and would have been completely unfair of me to do.
The cliff did its job. You vest to protect all parties and because it’s just the right thing to do. Take it from someone who walked off the “cliff”.
I’ve started multiple companies since then. Each has had a vesting schedule and a cliff for all founders.
Leaving a startup is a personal decision that can be very rational; I don't criticize your decision to leave. I am critical of your understating your importance to the business. I think that 1/3 of the company would have been far too much, but 0% seems far too low.
That's not what everyone is going for.
Take cto. When it's founders and maybe an employee, cto is a full-time dev.
Then you get funded, and four months later the engineering team is 4-6 people. The cto is now a line-level manager who codes a bit. It's a completely different job.
Then you get the next round, and suddenly the cto supervises 2-4 line level eng managers and has to decide if (s)he wants to be cto or dir-eng, because those roles are about or have already split. This, also, is a completely different job.
At each step, it's a completely different job.
Your company needs to be prepared for founders who don't want, can't, or aren't good enough at the next step that is required of them. Because the job literally completely changes every 2 years. Or sooner.
(The instrument which issues shares to Cofounder X will, in most cases in Silicon Valley, condition it on vesting via a repurchase right or similar mechanism.)
Interesting thought experiment for a US expat setting up a local corporation: at what step in the process does FATCA actually come into play?
If you dont have a BANK ACCOUNT and with national currency or securities in it, then there is no FATCA
Hm if that wasnt clear, stablecoins/crypto are exempt. Several stablecoins are FDIC insured according to the issuer. Form a US company just to access the international banking system and put a title on rent and pay for a github account. Let your international company just use crypto.
FBAR requirements are separate and distinct from FATCA.
E.g. let's say you raise your A after 4 years, the terms of the round might require that you unvest 2 years so that the investors have you locked in for longer, to avoid the issue discussed in the original post.