What if the co-founder quits and he has a stake in his hand?

Absrtact: Editor's note: The founder quit his business, what about his stake? This problem often bothers the entrepreneur. Dan Shapiro, Gimar Vaca Sittic and Simeon Simeonov wrote three separate articles specifically describing the machine that withdrew the shares from the founder of the separation

Editor's note: The founder quit his business, what about his stake? This problem often bothers the entrepreneur. Dan Shapiro, Güimar Vaca sittic and Simeon Simeonov respectively wrote three articles to introduce the mechanism of withdrawing the equity from the founder of the separation, this paper compiles and summarizes the basic concepts in the three texts and makes reference to the entry mechanism and exit mechanism of the partner equity. A text, sorted as follows.

Initial start-up, the founding team is unstable, often there will be a situation of embarrassment: the shares to the founder, some partners left halfway, but the hands still holding a company equity. This situation, often let the left-behind entrepreneurial partners, aggrieved and helpless.

In Dan Shapiro's "co-founder Equity allocation: 55 points is the worst way to do it", author Dan Shapiro simply mentions: The co-founder of the equity in any case need to set a mature mechanism (ie, vesting). The founder equity maturity mechanism refers to the arrangement of withdrawing the shareholding from the founder of the separation. The original translation is limited to the length of this content, this article will synthesize Dan Shapiro, Güimar Vaca sittic and Simeon Simeonov respectively written three articles, combined with Chinese law, the initial introduction of the founder Equity maturity mechanism.

When the co-founder leaves, he withdraws his stake.

You have a great business plan, and you find a great co-founder, and you decide to allocate 55 of the shares first. For the first two months, you worked very hard. But your co-founder didn't want to go on and went to work for a big company after leaving. But you still think the business plan is promising, so stick to it. Two or three years later, entrepreneurial projects have developed well, with large companies ready to buy and purchase your company, and offer expensive mergers and acquisitions prices. Your hard work has finally paid off. The co-founder, who had already left the job, returned with a 50% per cent stake and demanded half of the purchase price.

In fact, similar problems are very common in the entrepreneurial process, and there are many similar problems. Instead of waiting for start-ups to be merged, the founders are already distressed by the stakes in the founders ' hands. The founder equity Maturity mechanism is a solution to this problem. Most startups don't pay much attention to this founder-equity maturity mechanism, which is often destroyed.

The founder's equity maturity mechanism means: (1) Each founder will be given all of his shares in the beginning; (2) If the founder leaves the venture, the start-up enterprise has the right to buy back a certain percentage of the founder's stake at a very low price.

For example, in the previous example, if a start-up is set up in advance, the co-founder will leave the start-up business two months from now, and the price for the sale of the company will not be half a dime, as the company has bought back his stake when he leaves the company.

Many may think that the founder's equity maturity mechanism is restricting the founder's stake, which is in fact beneficial to the founder. This mechanism balances the interests of the founder and the founder of the left behind. It can be said that the founder's equity maturity mechanism is the founder and the best "friends": On the one hand, the founder with the separation of shares, will seriously damage the legitimate interests of the founder, weakening the motivation to continue to work, and this mechanism can effectively prevent this risk; On the other hand, This mechanism can also inspire each founder to work together towards the same goal, namely, to create a successful enterprise.

Let the co-founder get a batch of shares

The founder's share is used to reward him for his great contribution at the start-up stage of the enterprise. However, the founder of this contribution, in a relatively long period of entrepreneurship, gradually released. So, the founder's stake can be seen as the salary he earned during this period of business. As a result, the founders can be divided into batches of all the shares, such as wages, and then each interval for the founder to obtain a small stake.

The founder's equity maturity mechanism can be divided into the term model (time Based vesting) and the target mode (Milestone vesting). The term model refers to the founder's equity by maturity, maturity can be four years, can also be three years, two years. The target mode is to refer to the founder's equity to mature in batches according to the phased target.

Typically, the founder's equity maturity mechanism sets four years of maturity, the first of which is the founder's shortest service period (i.e. cliff). If the founders put all their working hours into the founding enterprise, after the first year of work, you can mature the One-fourth of the stock right at once, after that, start monthly or quarterly, a batch of mature subsequent shares, such as mature 1/48 per month, until the dry 48 months (4 years) after the full equity maturity. This term model is the most common founder equity maturity model.

So if the founder shares 50% of the company and leaves after two years of work, half of that 50%, or 25% of the company's equity, is ripe, and he can continue to hold the 25% stake, and the remaining 25% will be bought at very low prices. If the founder in the company's work less than a year, did not reach the shortest service period, then even the first stock rights (that is, One-fourth) are not mature, so finally he left the company does not hold any equity, the entire equity is the company repurchase. If he had worked his No. 366 day, the One-fourth would have matured, and the company could only buy back the remaining three-fourths, so he could continue to hold 12.5% of the company's shares (50% of One-fourth).

When the start-up enterprise realizes certain stage target, the founder a certain proportion of equity can mature. As a result, the founder's equity maturity is not tied to his service period, but to some of his performance. For example, when the product beta release, equity maturity One-fourth, the official version of the release, continue to mature a part of the equity, 2.0 release, mature part of the equity. If the product beta has not been released before the founder of the departure, then his equity is not mature, the company can buy back, when the founder left a little equity will not take away.

Goal setting in target mode must be very clear, otherwise, if the parties understand the goal is not the same, it is likely to be the goal has been achieved on the issue of controversy. For example, in the above example, if the stage goal of maturity is to release the product beta, then the partner who is ready to leave will likely be in a hurry to release the beta when it is not ready.

In my opinion, the start-up enterprises can take into account their own actual situation, comprehensive consideration can be taken as the maturity stage of the objectives of the issue, such as: the realization of a round of financing, equity maturity part of the number of active users to reach a certain amount, the maturity of a part of the stock right; Restaurant Branch , when the monthly operating income reaches a certain standard for three consecutive months, the stock right is mature part.

How to manipulate the mature mechanism

Dan Shapiro, Güimar Vaca sittic and Simeon Simeonov also have a few tips on the founder's equity maturity mechanism, summarized here as follows:

Identify mature mechanisms as early as possible. Set the founder's equity maturity mechanism as early as possible and sign a written agreement. For example, once you start working on an entrepreneurial project, you need to set up this mechanism. Most founders will sign such an agreement when the company is set up, even if it is not too late for the company to start making money or financing, since the founders who have left or are about to leave will find it difficult to agree to such an agreement.

The duration of a part-time job does not count to maturity. The founders only started working full-time for startups to start the calculation of maturity. If he started a part-time business for the first half of the year, then the six months can not be counted into maturity.

The period of work has been considered mature. If the company is ready to take the founder's equity maturity mechanism, but before signing the agreement, the founder has started to work full-time for the start-up enterprise, for example, has been working for a year, then the corresponding should be mature equity in the year, when signing the agreement can be immediately mature.

You don't have to be mature to throw money. The founder's stake in the stake is not to set a mature mechanism. If the founder accounted for 50% of the equity, 10% of that was because he invested 100,000 dollars. That 10% of the equity, there is no need to set a mature mechanism. Since money was put into the company from the start, the contribution of the money to the company was released at the outset, so the founders should have gained the equity right from the start.

From a legal standpoint, the founders have full rights to all equity (mature and immature), such as long-term capital returns, voting rights, and so forth, before leaving early.

Various countries and regions of the law is different, so the founder of national ownership maturity mechanism, also need to adopt different ways to achieve.

So the question is,

What about in China?

In order to avoid the founder taking the equity leave, the best thing is to break the founder's share of the shares into a number of batches, the founder, like earning a salary, each work for a period of time to get a portion of the equity.

The founder equity Maturity mechanism is: first, the share of the brain to the founder, and then mature in batches, the founder of the separation, the immature part, the company can buy back at a low price.

Why does the equity have to be a head of the total allocation to the founders, and then try to mature in batches? A batch of land allocation to the founder, so that is not it?

In Silicon Valley, the main reason for not doing so is tax. Early-stage stakes are cheap, and even if they are all one-off to the founders, there is no need to pay a high tax. If the founders, when the late-stage stake is already very valuable, the founder to obtain these shares, pay a high tax. So first give the founder a one-time, then mature in batches.

In China, the reason for not recommending this, I think mainly includes two points:

if the allocation of a group of shares every one months, then every one months because of the change in the stock right to make a business change registration, the cost is too high, may be the last equity change has not finished, the next batch of equity will be ripe. A one-time allocation of equity to the founder, the founder of the first to enjoy the full rights of shareholders, including the right to vote, so as to better inspire the founder of the sense of ownership, encourage them to actively engage in work.

Güimar Vaca Sittic Explains how immature stakes are being bought back by the company. For example, when a company registers 2 million shares, you and the co-founder hold 700,000 shares, and angel investors hold 600,000 shares. Two years later, when the co-founder's partner left the company, his shares matured by One-second, so he would hold 350,000 shares. The other 350,000 shares will be bought back by the company. The company's total stake was then lowered from 2 million to 1.65 million. As the total share is reduced, the share of the left-behind shareholders increases correspondingly. This is tantamount to leaving the founder's immature stake in the head of each remaining founder.

The Chinese company law also allows for similar practices and treats such repurchase as a corporate capital reduction. However, in the legal environment of China, the procedure is more complicated, more time-consuming, and less operational than the general equity change. Therefore, in order to avoid this problem, can be adapted to: from the founder to the founder of the repurchase of shares. Of course, if the founder of the number of left behind, you can appoint one of them to buy back, the repurchase of the equity, by the founder of the holding, but the actual proportion of the total remaining founder.