- Source link https://venturehacks.com/acceleration-termination
Founders accept vesting schedules to prove their commitment to their company. Accelerating vesting upon termination proves the company’s and investors’ commitment to the founder. If there are co-founders it can become a difficult decision between leaving shares behind upon termination and risking a disinvested co-founder trying to get fired and enjoy accelerated vesting
- How helpful? Scale of 1 to 5
- Topic Tags
Accelerated vesting, good cause termination, good reason resignation, vesting schedules
- Relevant questions addressed
How can founders prevent termination from investors?
- Summary bullet points
- Founders can be terminated by their company in a number of cases, and some people stand to benefit. Upon termination, unvested shares are usually lost by the founder
- A founder might be terminated because of repeated disagreements with a new CEO, incompetence, because they are damaging the startup, etc.
- Founders should include provisions that allow for accelerated vesting of a large portion of their shares upon unjust termination or resignation “for good reason”
- “Good cause” implies misconduct, negligence, fraud, contractual breaches, etc.
- “Good reason” for resignations includes position change, salary cut or a drastic change in location
- Acceleration should not be related to changes in company control/ownership
- This can be motivated with the fact that founders contribute proportionately more to the business early on but their shares vest evenly throughout a number of years
- Vesting schedules demonstrate founder commitment to the company
- Accelerated vesting at termination demonstrates investor commitment to the founder
- A board reflective of % ownership can help founders not being unjustly terminated
- With co-founders, it becomes harder because if one decides to leave the company they can just misbehave and get the investors to fire them without good cause
- There is a trade-off between leaving shares on the table and expected value of costs caused by co-founders who want to leave
- Follow-up links
Defining termination for cause in executive employment agreements - https://www.pillsburylaw.com/en/news-and-insights/defining-termination-for-cause-in-executive-employment-agreements.html