Anuj and Ying-Mei have formed a corporation to exploit a new software program conceived of, and written in large part by, Ying-Mei. Anuj and Ying-Mei met while Anuj was pursuing his MBA and Ying-Mei was obtaining a Ph.D in electrical engineering. During the two years that Anuj was in business school, he and Ying-Mei worked hard on their venture. Anuj engaged in extensive market research to validate the need for the software program and wrote a detailed set of functional specifications based on his market research. Ying-Mei wrote design specifications based on the functional specifications and then wrote the code for the software. While Ying-Mei was writing the code, Anuj wrote the business plan for their company.
Anuj and Ying-Mei met with counsel during the summer after Anuj’s first year of business school, and they agreed that they would each purchase 1 million shares of common stock in Nucorp at a price of $.01 per share. Because they agreed that they had already provided significant value to the venture, they also established that their stock would be 25 percent vested on the date of purchase and that another 25 percent would vest on the first anniversary, which would occur right after Anuj’s graduation from business school. Ying-Mei wanted to be rewarded for her contribution of the program to the venture, and Anuj agreed to give her an additional 25 percent of vesting on the date that she contributed the software program to Nucorp.
As a result, when Anuj and Ying-Mei started talking to venture capitalists after Anuj’s graduation, Anuj was 50 percent vested in his stock, and Ying-Mei was 75 percent vested. After several months of meetings, Enlightened Ventures presented Anuj and Ying-Mei with a term sheet, pursuant to which Enlightened Ventures agreed to provide Nucorp with the $5 million seed round of funding they were seeking, in exchange for preferred stock that would convert into 2.5 million shares of common stock.
The term sheet provided that Anuj and Ying-Mei would have to revest in their vested stock. In other words, each of them would have to agree that their 1 million shares would be unvested, subject to 25 percent vesting on the first anniversary of the venture financing, with 2.08 percent vesting each month thereafter so that their stock would be fully vested four years after the venture financing.
Anuj and Ying-Mei are, of course, not happy about revesting their stock, especially because they believe they have already made significant contributions to the venture. Enlightened Ventures made it clear, however, that this condition is a “deal-breaker” and that they are lucky to have found a top tier venture-capital group that is willing to make a substantial investment in the company. Anuj and Ying-Mei are concerned that Enlightened Ventures may terminate them before they are vested in any of their stock. They are also concerned that if Nucorp is acquired before they are fully vested, the acquiring corporation will already have a CEO and a chief technical officer, and therefore, they may have no place in the merged company. What kinds of compromise positions might Anuj and Ying-Mei want to discuss with Enlightened Ventures regarding the vesting of their founders’ stock?