legal, equity, founder, partnership, vestingA partner and I are in the process of establishing a startup.
Our current arrangement is that I will make a financial commitment to the company as a set amount invested over the next two years, in exchange for 50% equity. My role in the company would be more consultative than hands on, but I agreed that I would step in to fill in the gaps re: operational responsibilities as needed/as I am able. I will keep working my current job.
My partner, in turn, would work full-time at the company in exchange for the other 50% of the equity, and would not be putting any money in. They would also be receiving a salary to cover basic living expenses, etc.
Basically, I put in the money, my partner puts in the work.
Now, we have agreed that vesting shares would be the best way to ensure a commitment from both parties. It has been proposed that my shares be vested in proportion to how much of my financial obligation has been met. For example, if I have only paid 50% of what I said I would and decide to back out, I only get 50% of my shares.
Meanwhile, my partner’s shares are vested based on time spent at the company, again over 2 years. If he spends 50% of the agreed time and then decides to quit, he only gets 50% of his shares.
My problem is, I am imagining a potential scenario in future where my partner does not want to continue working in the company, but does not want to leave until all his shares are vested. Might he stick around and do the bare minimum of work just to ‘run out the clock?’ I do not want to be paying into something to which both sides are not committed.
In my case, it is easier; the money stops so the commitment ends. But in my partners case, should there/could there be a bare minimum amount of work set that would establish his continued commitment to the company? How might this be put into writing?
I have voiced these concerns to my partner, and he doesn’t seem to think there is a possible solution to this issue, and that there should just be a certain level of trust going forward. I’m trying to be a bit more pragmatic and would like to find out whether there is precedent for this type of situation and what people have done to resolve it. Any advice would be appreciate, and thank you very much!vs
It is a tricky thing you are trying to do, but not insurmountable.
I think more frequent smaller vestings (monthly over the 2 years, as suggested) is a better option than larger ones. But I think there is still the possibility of inequity, or perceived inequity.
When my partners and I started our company, I contracted to earn money for our company, while they worked full time on product building, marketing, pre-sales, networking, etc. It was an interesting time, and we purposely chose a low risk strategy. It was also slow growth as well, but the three of us were single and didn’t mind being paid minimum wage.
We started with fairly clear roles, which obviously changed over time, but we decided to issue 100 shares each at company formation. For us this worked.
A contrary story: A friend started a tech start-up, which used delayed vesting as payment for website work. This didn’t work for a few reasons, but it came down that there was a mismatch between the perceived value of the company versus the work that was being put in by the website dev.
You need to make sure that you both are happy with the amount each of you put in (your £/$, his time). I would suggest that you need to agree either hours worked / week for him (or based on deliverables), with an equivalent £/$ put in for you.
You both should consider what happens to the shares that have been vested, but the other person leaves, then the company becomes a going concern … whoever is left really doesn’t want an ex-partner being a dividend beneficiary! This should be specified in the shareholders agreement before you start.
Other thoughts for you, if one of you leaves before the full vestment
I think these things are best talked about and agreed with business partners in the cold light of day, before there is any emotion or money attached.
At startup stage you will inevitably be faced with variables/ scenarios outside your control. The challenge is minimizing them, which I see you are properly so.
Regarding your partners shares vesting relative to ‘time’ spent- I suggest adopting and clarifying work responsibilities instead. This is tangible, easier to measure and enforce as a primary element within your operating agreement.
One scenario, not addressed in your post, is what occurs if your partner or business doesn’t need your full capital commitment. This needs to be addressed as a whole and without contingencies, e.g., whether funds are generated from business activities v personally obtained elsewhere.
Overall, it appears you are approaching this role as sponsor. Focus instead on partner as principal investor. Also, does your partner have any skin in the game? Locking in 2 years of operating expenses and salary seems like a no loose proposition without inclusion of personal motivation factors which accurately reflect the term- vested interest.
Pragmatism, by way of yourself, serves others well. Stay the course.
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