Startup Must-Do: Drafting a Vesting Agreement - Free Enterprise

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Startup Must-Do: Drafting a Vesting Agreement

You are enthusiastic and energetic and you believe in your new business. In fact, you believe in it so strongly that you're too busy working to protect it legally. That's a mistake.

In the beginning stages of a startup venture, you may rely on goodwill and drive. But don't leave yourself or your business vulnerable to changing winds. A vesting agreement protects new businesses and individual partners, ensuring that dedication to the company really does pay and that no one can walk away early and still get rich.

What Does Vesting Mean?

To protect your business, you can set up vesting shares, or shares that have conditions related to the passage of time. What that means is that the shares of the business are split up and have certain terms that impact value depending on when a founder looks to leave or sell stock. According to Guimar Vaca Sittic, an Internet entrepreneur and former Director of TEDxUChicago wrting for The Next Web, having a vesting agreement is critical.

Standard vesting clauses typically last four years and have a one year cliff, meaning a founder who leaves before the end of the twelfth month will get nothing for the stock. With this standard vesting agreement, the longer you stay at the startup, the larger percentage of your equity will be vested until you become fully vested in the 48th month, or after four years.

In other words, each month you work 1/48th of your equity in the company vests. But don't forget that cliff -- it only works if you stay at least 12 months. Additional terms can be added to ensure other conditions are met.

Getting It Done

There are many other factors to consider when drafting a vesting agreement and you should not expect to be able to do this without an attorney's help. Still, Sittic writes, "Sometimes there's a delay between working (coding, planning, etc.) and incorporating the company. I personally recommend doing the not-so-official napkin vesting document so you are all on the same page from the very beginning."

You should consult with an attorney as soon as possible in the founding process and talk to partners about how to structure your company. If you're lucky, this business will always keep you busy. Ensure its success and your own by creating a vesting agreement early on. Talk to a lawyer today.

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