Where and when to use Vesting in a Startup?

Where and when to use Vesting in a Startup?

Where and when to use Vesting in a Startup?

Vesting is a very important resource for any entrepreneur, especially those who are somehow involved with startups.

It is a legal term widely used in the United States and throughout the scene of VCs and Startups. It does not seem to be a very common term in Brazil, but the practical part, can be fully applied
over here.

It is not exclusive to Startups or the technology area, in reality, it is a very comprehensive term that encompasses several situations:

Remembering that I am not a lawyer and know little about the details legal technicians. What I mention here is what I know and lived, how it is, and how it should be used in a real situation.

As every society has an end and it often arrives earlier than expected, the best thing to do is to decide the end, at the beginning. It is a time when everyone is happy, motivated and well intentioned.

Being well resolved with the end in the beginning is fundamental and will give less chance for fights and disagreements.

Vesting helps you to resolve an important part of this end, the participation of each one in the company.

At the beginning of a company, shareholders and their due participation are defined. Over time, it is common to assign minority stakes to employees, advisors and the board, but before that happens, it is important to define the conditions, and this is exactly where vesting comes into play.

Imagine that one day the partners decide to embark a very important employee and give him a 10% stake in the company. A month passes and this employee / shareholder decides to leave. Years pass, the company grows impressively and when it is at its peak, this employee returns demanding his 10% stake. In this case, it would not be fair at all if this employee, with only 1 month in the company, was entitled to any percentage, let alone 10%.

Vesting should be used for all shareholders who have not purchased their stake in the startup.

This includes founders, employees, advisors, board members, etc. It has total connection with the verb to dress, and it really means that these people will wear the actions they are entitled to over a certain time.
In the technology startups segment, 4 to 5-year vesting is often used for founders and most important employees. For advisors and board members this number may be a little lower, around 2 to 3 years.

A metric that I like and usually use is: After 12 months, 25% of the legal actions are perpetuated, the other 75% are divided by the remaining months and perpetuated month-by-month.