How do you avoid common pitfalls or mistakes when setting up your co-founder vesting schedule and cliff?

Firstly, clearly define the roles, responsibilities, and expectations of each co-founder before determining the vesting structure. Set a reasonable vesting period (typically 3 to 4 years) with a one-year cliff to ensure commitment. Avoid equal splits if there's a significant disparity in contributions. Include acceleration clauses for specific scenarios, such as acquisition or departure. Document the vesting terms in a legally binding agreement to prevent misunderstandings later on. Regularly review and update the agreement as the company evolves. Lastly, seek legal advice to ensure the vesting schedule aligns with local laws and regulations.

I always like to keep things simple when discussing this topic with my portfolio companies. The most common structure is a 4 year vest with a 1 year cliff for ALL founding team members. Anytime I have seen accelerated vesting schedules or no cliff its usually a red flag for me as an investor. Why create potential problems where they don't need to exist. Stick to the basics and focus on customers, revenue and growth. If you find yourself arguing about vesting and cliffs, you don't have the right team in place.

Many helpful comments in this section. But not one has noted that in start-ups structured as pass-throughs for tax purposes (LLCs generally but also LP funds), OPTIONS are the wrong choice. Vesting is tied to Incentive Units (sometimes called Restricted Units) which are profits interests for tax purposes. Similar restrictions like 4 years, milestones, cliff etc. are all do-able and smart. But with special equity instead of options. Work with an experienced tax advisor up front to make sure you are making the right choice of entity for your business and to make sure your equity structure clearly reflects the tax and economics your investors need.

As I delved into the startup world, I learned that vesting is how co-founders earn equity over time, ensuring commitment to the company's growth. I found the concept of a 'cliff' particularly interesting – it's a period (usually a year) where no equity is vested, safeguarding the company if a co-founder departs early.

The most standard vesting period will be 4 years, but for co-founders, it can make sense to choose a longer vesting period. One way to think about it is to say: "What is the most realistic timeframe it will take to build a viable company?". For most startups, a "viable company" will likely mean a million dollar annual revenue, +50 employees and potentially multi-million dollar outside investments. Reaching this within 4 years would seem highly optimistic, so it's likely that you'll have a longer vesting period for your co-founders.

The vesting period may commence before the official incorporation of the company and issuance of shares to founders, as founders typically begin working on the ideas weeks, months, or even years before the company's formation. The shares that vest before incorporation or the share grant date can serve as compensation for contributions made by the founders during the pre-incorporation period. However, institutional investors, such as VCs, PE funds, or subsequent investors, may be reluctant to approve or accept vesting schedules commencing more than one year before the company's incorporation. Therefore, it's advisable to set a realistic commencement date based on industry standards and negotiate other favourable terms in lieu.

In my journey of teaching Chinese online and consulting startups, I realized the importance of aligning the vesting period with business goals. I chose a four-year period, considering the time needed to establish my brand and solidify my online course's market presence. I learned to be flexible, understanding that as my business evolves, so might the appropriate vesting period.

Determining the right equity split among my partners was challenging. I had to weigh contributions, roles, and responsibilities. For instance, the equity split reflected not just capital investment but also the intellectual input in developing my online course.

Sign a co-founder agreement as soon as possible, this will allow you to get your business on the safer side. A co-founder agreement will be formed by a legal team by both cofounder's mutual discussions, if any mishappening occurs you must execute scrutiny and safeguard the business first. The job of an entrepreneur is to : 1. Safe business first 2. Safe himself/herself from any mishappening

In my startup consulting, I realized the importance of acceleration clauses, especially in acquisition scenarios. I decided on a double-trigger acceleration to balance protection and motivation post-acquisition.

A main purpose of a vesting schedule is to ensure that employees will not be able to walk away from the company with a disproportionate amount of equity compared to the contribution they made to the company. A common mistake made by founders is to exempt themselves from a vesting schedule, assuming that they will always be part of the company. This often leads to unnecessary complications upon a co-founder's departure, which is a very common occurrence. A proper vesting schedule makes things clear and simple. Every employee, including co-founders, can walk away at any time with a fair and agreed-upon equity distribution that reflects their time and contribution to the venture.

I learned from fellow entrepreneurs about the messiness of co-founder exits. So, I made sure our vesting agreement clearly stated terms for such situations, including share repurchase.

I set up annual reviews for our vesting schedule to ensure it remains aligned with our evolving business strategy. Adjusting the vesting terms as our startup grew became a crucial task, especially as I expanded my online teaching and consulting services.

- Seeking Expertise: I didn't hesitate to get legal advice to ensure our vesting agreements were solid and compliant. - Open Dialogue: Maintaining transparency with my team about vesting terms helped in building trust and alignment. - Reflecting on Business Goals: I regularly revisited our vesting schedule to ensure it matched our business objectives and growth. - Caring for the Team: I learned that fair and motivating vesting terms positively impact team morale. - Future-Readiness: Understanding how vesting terms can influence future investment prospects was a crucial lesson in my startup journey.

Consider implementing redemption rights (also known as clawback provisions) in your equity grants. These rights allow your company to repurchase equity from grantees at determinable prices in the event certain "triggers" occur. Redemption rights are highly customizable. Triggers can vary widely but often include scenarios such as a grantee leaving the company without cause or being terminated for cause. For instance, if a grantee commits fraud, a redemption right might enable your company to buy back (or "clawback") their equity at a nominal price. Given the complexity of equity grants and the potential liabilities involved, you should consult with an experienced business attorney before issuing equity. *This post is not legal advice.