There’s a lot to consider when starting a business, but the relationship with your co-founders is probably one of the most critical parts.
I learned about early vesting and salaries the hard way. On the company I started in 2012 we did have a good vesting agreement in place, but failing to define salaries spiraled badly. I ended up with about ,000 in credit card debt, which may not sound like a lot to you, depending on where you live… but 23-year old me, living in Costa Rica where the salary that I could aspire to was ,000 a year- it looked like I was going to spend the rest of my twenties paying that back.
Let’s start with stock and vesting. Once again, if you don’t understand how stock works, you should check out this video.
Let’s look at a simple and common scenario. Founder A comes up with a business idea for a tech startup. He has a business background and is a great hustler, but can’t code. He seeks out Founder B, who has a tech background and has the experience to become the company CTO moving forward.
Probably a lot of debate here, but I am going to say in this situation this should be a 50/50 split. While Founder A has the idea, he can’t execute it without Founder B.
Now, this may be re-balanced if, for example, the business has some traction before Founder B comes in. And don’t count ‘talking to customers’ as Traction: I’m talking revenue, sales, rounds of funding… users at least. That traction is worth something, so Founder A should be compensated for reaching that traction before Founder B came in.
Now, let’s say Founder A and Founder B agree on that 50/50 split, and six months later Founder B leaves. That would suck for Founder A who now has a missing-in-action partner who owns 50% of the company.
This is what Vesting is for.
A standard agreement is a 12-month cliff and 4-year vesting. This means that we’ll take stock of each founder, say 500,000 shares, and split them in 48 months. That’s about 10,416 shares per month.
For the first 12 months of working for the company, this stock will not vest: this is the cliff. That means if that person leaves, he won’t take any stock in the company.
On the 12th month, at the stroke of midnight, the vested shares for those 12 months will be executed, which means that founder will now on 125,000 shares of stock in the company, one-fourth of his take.
The remaining shares will continue to vest. In case of that person leaving, the remaining founders are still protected.
Now, if you have a US business, it’s really, really, really important that you file an 83(b) election if you are receiving vested stock. You can find a free template for this on FounderHub.
An additional challenge here is many businesses don’t start with funding or money in the bank- so the founders still have day jobs or side projects to pay their bills. How do you establish, then what ‘fully dedicated to the business’ means?
When we started the company, we agreed that each founder would have a ,000 salary. While our living situations and monthly expenses were different, we decided that was enough to live in San Jose.
So the priority was obviously taxes, legal fees and so on… but as long as the company had money after those necessary payments, everybody would get their full paycheck.
We self-funded the company for about a year, mostly with small consulting projects. We agreed that those were company projects, not individual projects…
This worked rather well for us, only a couple times we had to delay our payments- and we agreed that it was each one’s responsibility to ‘survive’ until the next paycheck came in.
It’s not pretty when companies run out of money, and there isn’t enough money to pay stuff. That’s a terrible time to agree on things.
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