• October 2018
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What happens to the unvested stock when a co-founder leaves the company?

This is an important topic for startup owners, since businesses in their early stages tend to see lots of personnel changes. That’s just the nature of the beast, so it’s important to think about questions like these right at the start.

Usually, when a co-founder leaves before all of his or her stock options are vested, what happens is this: Unvested stock remains with the company and is converted to treasury stock, while the company may exercise their right to repurchase vested stock at its original price.

This is the most common scenario, but it all depends entirely on the agreements that are put in place at the beginning. Below are some of the other ways in which the situation can play out:

If the company does not have the right to repurchase the vested stocks, a cofounder could conceivably quit early in the life of the startup, only to see a huge windfall years later, after the hard work of those who remained at the company have paid off.

Often, a company will put a “cliff” in place: usually a one-year period after which, if the employee stays with the company, the first increment will become vested. There are also scenarios in which the vesting schedule may be accelerated.

You should also be familiar with the term “right to first refusal”. Basically this means giving the company the first crack at buying the stocks. Should they refuse, then the founders (depending on the agreement) might have the option to buy them, then the investors, and so on.

On the other hand, the parties involved may have a “co-sole” right in place. Which sets the course if a co-founder finds a buyer for their shares.

These are just a few of the ways your situation can get handled. In almost all cases, it comes down to what you exactly agreed to.

Got more questions? Check out: www.LawTrades.com

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