The Case for Longer Founder Vesting Periods (and Constant Revesting)

Last week, I spoke to a friend who is a partner at a tier-one San Francisco-based VC. He asked what I thought about founder vesting. I said that I think it should be longer and founders should revest with every fundraising round. He asked me to write a blog post about it, as he feels that only VCs bring it up, making them look like the bad people. He hopes that founders understand that revesting is there to protect them and the company, not the VCs. So here goes.

Founders can part ways, so protect yourself and the company

I’m sure that the first reaction many founders have when reading this is, “Why should I increase the vesting period or even revest shares after I worked so hard earning them?” My answer is simple: the journey is much longer than you think, and vesting protects you and the company.

In my entrepreneurship career across three companies, I parted ways with two cofounders and got stuck with one that owned all his shares and barely worked. These experiences allowed me to see the value of increased vesting periods and revesting firsthand.

Here’s a scenario that you don’t want happening to you. Let’s say you incorporate your company, there’s more than one founder, and you do the typical four-year vesting period. Now let’s say it takes two years to get to an A round. Immediately after the round, your cofounder decides to leave, or even worse, stay one more year and then leave. They just went with 50–75% of their shares. That means more dilution for everyone in the company down the road. And if they stay for one or two more years and get all their shares, they might have no further incentive to stay.

And it can get worse. Let’s say you do your B round four years after you founded the company. You are at $3–5M ARR and have a long way to go to hit a $100M ARR milestone. Immediately after the B round, your cofounder gets an offer to make double their salary somewhere else. Why would they stay? They can leave with all of their ownership, make more money, work less, and have the other cofounders do all the hard work to get to the promised exit. They’ll get as much as you without putting in the work.

A new proposed framework for cofounder vesting

That is why I ask for revesting of founders’ shares in every round. I do it because I understand how vital founders are to a company’s success. And I want to ensure that incentives align with the required long-term commitment. Also, I want a mechanism that enables us to bring someone else aboard if a founder leaves or we decide to part ways. That mechanism is their unvested options, which can go to someone else.

Starting a company is a 10-year commitment, and most of the company-building work begins after the A round. I see so many founders who think they have done so much before scaling. That might be true, but you’re maybe three percent of the way at that stage.

I suggest the following for a company that has more than one cofounder:

1. Six to eight year vesting period for cofounders instead of four
2. Revesting of all cofounder options after the seed round, meaning that they’re all back to day one
3. Revesting of cofounder options that haven’t vested yet in A and B rounds (for example, if at the B round half of your options vested after two years, the remaining half would vest over the next six years instead of two)
4. Granting cofounders more options over time, so if they choose to leave, they’ll need to spend more to buy their shares

Some may think this is unfair to founders, as they earned their options. But my experiences have taught me that it’s the fairest solution for founders who are there for the long run and intend to invest at least ten years building their company. If you don’t intend to invest that time, I don’t think you should start a company.