What restrictions can be placed on founder stock, and why?

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There are several restrictions that can be placed on founder stock and they are typically implemented to protect both the company and the founders themselves Heres a breakdown of some common restrictions and their purposes 1 Vesting Why Vesting ensures founders remain committed to the company for a certain period If a founder leaves before their shares fully vest the unvested portion typically reverts back to the companys stock pool This discourages founders from abandoning the company shortly after raising funds Structure Vesting schedules typically span several years eg 4 years with a cliff where some percentage eg 25 vests after an initial period eg 1 year and the remaining portion vests incrementally over time eg monthly 2 Lockup Agreements Why Lockup agreements prevent founders from selling their vested shares for a certain period after a funding round This prevents founders from cashing out too early and ensures they remain invested in the companys longterm success Duration Lockup periods can vary but are often 1218 months 3 DragAlong Rights Why Dragalong rights protect minority shareholders founders in case of a company acquisition If a majority shareholder investor agrees to sell their shares dragalong rights allow minority shareholders to sell their shares at the same price This ensures founders can benefit from an acquisition even if they dont own a controlling stake 4 TagAlong Rights Why Tagalong rights give minority shareholders founders the ...View the full answer

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