You and your friend, F start a company, Startup Inc.
Each of you own 50% of Startup Inc. today.
After one year, F decides to leave. He sells his 50% to a third- party (T) and walks away.
T doesn’t work with you on a daily basis. He plans to sit quietly & take 50% of the profits at the end of each year.
You are screwed.
You are now running 100% of the company while being a 50% owner.
It is going to be supremely hard to get new investors on-board. You can’t sell the company & walk away either
You are screwed.
How do you avoid this problem in the first place?
Vested Equity: Although each co-founder is entitled to 50% of the company, they can only earn it if they stay with the company for certain years.
The minimum number of years is called Vesting period.
Standard Vesting Period is 4 years.
In the above scenario, both you and F earn your 50% over 4 years.
At the end of every year, both you and your friend get 12.5% each (50 divided by 4)
Now, if F decides to leave after one year, he only gets 12.5%
The rest remains with the company for you to get new investors, expand your founding team etc
