I've discussed the allocation of equity in an earlier post; here I discuss restrictions on equity linked to retention of founders and execsWhen founders and executives get together to start a new company there is a lot of excitement and jockeying for equity ownership positions. I have discussed the considerations for carving up the equity pie in an earlier posting; in this note I want to talk about restrictions on equity linked to retention of these founders and executives.
Obviously, investors and other
Typically the management and control of equity ownership is managed through vesting of options, or restricted stock repurchase rights. If a founder is granted options to purchase shares vesting over, say, four years, then if he decides to leave after two years, he will have vested 50% of his options and be entitled to purchase those 50% of the shares under the terms of his option agreement. The unvested options will be cancelled and returned to the option pool for re-use under the general Company option plan.
Because options are not shares of stock and do not have shareholder voting rights, Companies often use an alternate method of equity management, selling or granting actual share ownership to a founder, but reserving the right to repurchase any shares that may not have vested, if the employee again leaves. This is essentially the same process. If an employee was issued with restricted stock whose repurchase option lapsed in equal instalments over four years, and left after two years, the company would have the right to repurchase 50% of the shares. The restricted shares may be purchased for cash, in exchange for contributed IP or services , or against an at-
Blog post
Note on Equity Incentive and Retention
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Human Capital