The core idea associated with the vesting of stock is that when a firm launches, instead of issuing stock outright to the founders, it chooses to distribute the stock over a period of time, typically three to four years, as the founder or cofounders “earn” the stock. The firm follows the same practice with employees who join the firm later. The reason vesting is a smart move is that although everyone is normally healthy and on the same page when launching an entrepreneurial venture, you never know what might happen. You want everyone involved with the venture to feel engaged with it across time. A typical startup’s vesting schedule lasts 36 to 48 months and includes a 12-month cliff, which is the amount of time a person must work for the company to leave with any ownership interest. Thus, if a firm has a 48-month vesting schedule and offers 1,000 shares of stock to an employee, if the employee leaves after 10 months, that person does not retain an equity ownership position in the firm. Employees leaving after 28 months will retain 28/48 of the promised equity, or 583 of the original granting of 1,000 shares. The employee would receive the shares at a specific price. If an employee leaves and the company has the right to buy back the person’s shares, a buyback clause typically allows the firm to repurchase the shares at their original issuance price. Vesting avoids three problems. First, it helps keep employees motivated and engaged. If an employee received their entire allotment of 1,000 shares on day one that person could walk away from the firm at any point and retain all issued shares. Second, if an employee departs acrimoniously, for whatever reason, the firm avoids a disagreement about how many shares the person will own when leaving the firm in that the vesting schedule includes that information. Additionally, if a buyback clause is in place and it stipulates the formula for determining the value of the departing employee’s stock, the firm can repurchase the shares without an argument. It is never a good outcome for a former employee, particularly one who left under less-than-ideal circumstances, to remain a partial owner of the firm. Third and finally, investors are generally reluctant to invest in a firm if former employees own a block of its stock. Such a situation simply spells trouble, which, of course, investors seek to avoid.....

Discussion Questions:

1. Often, investors receive criticism for insisting that a vesting schedule be put in place for stock the firm chooses to issue to employees. After reading this feature, do you think there are justifications for this criticism? If a company anticipated that it will never take money from investors, is it still a good idea to establish a vesting schedule? Explain your answer.
2. Why do you think startups launch and distribute stock to founders and other members of their new-venture team without vesting schedules?
3. Is it typically necessary to hire an attorney to establish a vesting schedule for an entrepreneurial venture or can the new firm handle this task?
4. Given your reading of this feature, explain how you think employees who own shares of a newly launched firm would view themselves as partners in such a situation.