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I am just curious about vesting as against 3 things - Dilution, a Co-founder leaving, a co-founder getting fired

Please assume a 2-man team with the equity split among the founder & CEO (A) and co-founder (B) being 80% and 20% (4:1 ratio) and assume both of them have same vesting schedules (20% each over five years).

Say after year 1, A and B have vested 20% of their initial split (i.e. A now has 16% shares vested and B has 4% vested; also, A's 64% is unvested as against B's 16%)

Now, my questions are around how will B's vesting and dilution be affected if at the end of year 1:

a. An angel is to be alloted 25% stock

b. B decides to leave on his own after Year 1

c. A decides to fire B (since A is the CEO)

Please do share your thoughts on what is common across start-ups in such situations!

I understand this might be considered silly and elementary for this forum. But would be highly beneficial if you could take a few minutes out in that case to point out existing relevant literature on this forum or elsewhere!

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This is easy to figure out if you stop thinking in percentages and think in number of shares. Try it, you'll see, it becomes obvious. – Alain Raynaud Nov 15 '11 at 4:17
Thanks @AlainRaynaud! I gave it a shot. But say there were 10k shares in the beginning. So after a year, 2k and 0.5k vested on A and B. Now, if B left/ got fired and there is no acceleration for him, and assume there is no further issuance of stock, assume an incoming investor who wants 80% (8k shares) of the stock. I know it is an extremely hypothetical situation. But how to go about alloting him 8k shares from A's and B's vested and unvested shares? Essentially, after B left, what happens to his 1.5k unvested shares and how does future dilution happen impact his vested 0.5k shares? – rokstr_dli Nov 15 '11 at 5:18

1 Answer

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This depends entirely on the company's articles of incorporation and the various contracts:

a. Are new shares issued, or does the angel get existing stock? 25% of what? What has been agreed with the investor?

b. What does the contract with B say?

c. What does the contract with B say?

More on (a). Suppose there are 1000 shares authorized in the company, and at the end of the first year A has been issued 160 shares and b has 40. You can now either sell 25% of the 200 shares already issued to the investor, authorize and issue 67 new shares to the investor (who now owns 25% of the issued shares), or authorize and issue 333 shares to the investor (so the investor owns 25% of the authorized shares).

So as you can see, the answer to all three questions is "it depends".

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Thanks @Mike. I now see how complicated this can get. The thing is, we are just about to incorporate. So, technically we haven't agreed on anything. What do you think would be the most fair way (for A, B and most importantly the company) to go about? – rokstr_dli Nov 15 '11 at 5:52
Fair is what you all can agree upon. These clauses are generally in shareholder / employment agreements - whereas authorized shares (often unlimited), issued shares are in articles of incorporation. For startups with multiple founders, consider a "shotgun clause" (Google for details) in case the original partnership breaks up. I'm not a lawyer, so I'd prefer not to give specific advice - especially as local laws may apply. – Mike Nov 15 '11 at 18:35

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