• June 2019
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Should Founders Have Shares Vested Prior to Signing Contracts with Investors?

lawtrades cofounders vesting

When aspiring business owners and startup founders decide to form companies in partnership with co-owners, they will be faced with the critically important task of creating founders’ agreements. Such an agreement allows a company’s founders to cement their vision and iron out crucial practical details related to the launch of their business.

Usually included within a founders’ agreements are numerous important and fairly standard elements. But every founders’ agreement is a bit different. If you are interested in starting a business or launching a startup with co-owners, you may choose to add or subtract from the relatively standard list of elements typically relevant and worthy of inclusion in your agreement. If an element will not apply to your company, you may omit it. If you would like to work out the details of your vision in additional ways within the document, your attorney can help you to ensure that these factors are properly addressed.

For example, many founders’ agreements include company goals and the responsibilities assigned to each founder. Obviously, your attorney will need to work with you in more formal capacities to ensure that the ownership, management and economic interests of every founder are legally enforceable and clearly defined. But the founders’ agreement is a great place to begin etching out these critical details. In addition, you may wish to discuss accountability protocols, equity breakdowns and a vesting schedule for that equity, if your company is formed as a corporation. Compensation, intellectual property and termination issues are also frequently addressed in such agreements.

The most important thing to keep in mind when determining which matters you and your co-owners should address in your founders’ agreement is that this document provides the foundation for your company moving forward. Failure to treat the agreement process with care and consideration may cost your company in a host of ways down the road. For example, if you do not contemplate the potential consequences of your vesting schedule, your business may suffer financially in ways that are often difficult to recover from.

 

Vestment Schedule Considerations

It is important to carefully consider timelines for the vestment of your equity and your co-founders’ equity in your company. In general, investors expect to see new companies adhering to a market-typical schedules appropriate for your business-type and industry unless there is a pressing reason for an exception to apply. For example, it generally makes sense to vest in monthly installments over a period of a few years rather than vesting shares all at once. Investors may be wary of significant block vestments made in this way. In addition, thoughtful vesting schedules tend to encourage sweat equity among founders so that none of your co-owners will be tempted to rest on their initial investments and fail to earn their keep during the critical months and years after your business launches.

 

Investment and Business Guidance Is Available

There are many technical and legal considerations when it comes to creating a document that provides the foundation for your company moving forward. From drafting founders’ agreements to raising initial capital for your company, the business contract attorneys at LawTrades can provide valuable guidance.