Becki DeGraw on founder vesting, advisor equity & the 4-term-sheet play

Jason Calacanis (0:06)

All right, everybody, it's my favorite time of the year. I get to do startup basics. What is startup basics? Very simple. There are things you need to know that are simple and basic, but they're important. They're foundational in being a founder. And if you get these things wrong, whether it's accounting, product market fit, sales or legal, they can have downstream effects that you will then spend 10 or 20 times the effort to clean up than if you had just known your basics. We keep all of these at thisweekinstartups.com/basics so that you can remember.

And Becki DeGraw is back with me. She's from Wilson Sonsini, Goodrich and Rosati. We call them WSGR here in the valley. And we're going to talk today about founder and advisor equity.

Becki, welcome back to Startup Basics.

Becki DeGraw (0:57)

Thank you. It's good to be back. And always, always love chatting about this stuff. And this is a fun one. This is always near and dear to our founder's heart.

Jason Calacanis (1:05)

Yes. So let's get started here. A founder starts a company.

They don't want to be on the venture track. So they're a company. You and I start.

Becki and Jason Enterprises and we're building software. All good. You own 50% of the shares. I own 50 Probably you would own 41%. I think you probably can't negotiate me. I own 49% of the shares and here we are. We're in business. We got all our shares on day one. We're rocking and rolling. We make a bunch of money. But at some point, you come back to me and say, hey, I got this venture firm, Acme Ventures wants to put a bunch of money in. Now, we have to reset the festing of our shares and we have to have a whole other discussion and then they want an employee stock option pool in ESOP. What's that? So let's take it like we do here on Startup Basics from first principles from the basics. When you're on the venture track, there is founder vesting. What is it? How does it work? Why does it exist?

Becki DeGraw (2:00)

As a founder, you buy your shares, you own your shares on day one, you get all the voting rights associated with the shares, but investors want to know that you're going to stay with the company. So we put a vesting schedule on those shares so that they vest over time. What does that mean? If you were to leave the company before the shares are vested, the company has a right to repurchase the unvested portion of the shares. Usually, it's at the lower of whatever the original cost was that you bought those shares at or the current fair market value. For a founder, if you're buying your shares at the earliest of days, we're hopefully at the point where we can say, these shares are worth 1,000th of the penny per share. You want to write a really low check to buy those shares. So the cost is nothing, and the company has the right to repurchase at that cost if you leave before the shares are vested. As you said, if you're going to go out and seek any type of institutional funding, particularly from VCs, you're going to have to have vesting on your shares. These are what we call the golden handcuffs for the offenders, and it makes sense in those early days.

When investors invest in a company at the pre-seed stage, even at the A stage, there probably isn't much there at the company level. It's really the founders, their ideas, their vision that the investors are excited about and putting their money in, which means the investors want to make sure that those individuals are staying at the company to execute on that vision.

I would also say that even if it's just you and I and we're doing this venture and we're going to backstop it, we're not going to take that VC money because there's all the bells and whistles that go with it, there might be a reason, I would argue, to include vesting to protect amongst the founders themselves. If you have two or more co-founders, one of them turns out, maybe they're not pulling their weight or they decide, whoa, this startup stuff is crazy. That's not exactly it looked like it was fun. This isn't what I had in mind. Or one of them gets lured away by some big comp package that one of the tech giants is throwing out. You don't want them walking away with fully vested stock owning 50 percent of the company.

Even if you're not going to pursue investor money, you may want to think about it to protect each other.