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Founder Vesting

Founder Vesting

  • Term

    Main definition

  • Founder Vesting

    A requirement sometimes imposed by investors upon the founders of a company. In early stage ventures with a favorable valuation, one of the keys to justifying the valuation is a promise that the founders will continue to work for the company full-time.  If vesting is imposed by an angel or a venture capital investor, a portion of the ownership position of that founder is retroactively made "unvested" and will only "vest" (in effect, regain their status of being fully-earned and nonforfeitable) in stages during continued employment with the company.  Investors insist on these restrictions so that the founder continues to be strongly motivated by his or her large economic interest in the company. Such unvesting of previously vested shares requires the agreement of the affected founder.  Placing vesting on the shares means placing restrictions and penalties, including potential forfeiture of those shares, and each time a portion of the shares vest, the restrictions and penalties lapse as to that portion of the shares. Over a period of time, all of the shares will have vested, assuming that the founder continues to work for the company or satisfy other commitments made in his agreement to the founder vesting.  Founder vesting is designed to discourage founders from leaving the company. If the founder is employed by the company, the founder vesting may also serve a purpose of retaining the employee.  Investors may want the founder to agree to make his or her shares unvested because they want to delay the founder from disposing of the shares. Sophisticated investors also try to ensure that founders do not receive a windfall from their founders' shares prematurely (before the investors have an opportunity to exit). If the investors so require, founders frequently will agree to some form of founder vesting.  Founders do not usually agree to make all of their founder shares subject to founder vesting and often limit the founder vesting period to three or fewer years.

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