Founders, consider ‘Reverse Vesting’ from the get go

Founding a startup is a very exciting experience. It is a big personal jump. It is also a supreme moment of trust between the founders who are betting their future on one another. Many decide at a time like that to share their equity either equally or something similar to that. This is all good, however what will happen if for whatever reason a founder will decide to depart the venture after a year? Does the departing partner still need to hold 50% of the venture? What is the value of idea and what is the value of building of a company?

There is a good mechanism I suggest every high-tech founder consider – ‘Reverse Vesting’. It is a legal mechanism which allows founders to receive real equity (not options), but provides the company the right to purchase the unvested shares in a minimal value according to a vesting schedule. Usually over 3-4 years with a cliff of 1 year. There are many variations that should be discussed among the partners and with a good deal making lawyer, but in general this is the concept. In my view it is critical.

In a startup where none of the founders is actually investing real money, I highly recommend considering reverse vesting. Why? because an idea in our world is not enough. It is only a start. Value is created by establishing a company, recruiting people, getting investment, building a product, getting it to the market and doing business. The founders that invest in time and effort should be rewarded. That’s the reason it is called “sweat equity” – in order to get it, you sweat!

Let the discussion begin.