Written by Ian Sharp PhD on June 11th, 2019
Ian Sharp here and you are listening to The Good Doctor Sharp on DoctorsInTech.com Today's topic is vesting of company shares, specifically as a function of time. This type of vesting schedule is known as time-based vesting. So, let's start this off by saying that I certainly have yet to witness any time-based vesting agreement "empower" or cultivate growth at a technology startup company. Founder: "But Dr. Sharp... I've got a 4 year vesting schedule WITH a one-year cliff and I'm proud of it. I'm proud of knowing how to say it, and I'm proud of knowing what it means." Dr. Sharp “Sorry to hear that man... you might want to seek counsel" I can only openly tell you what I've seen in my life experience and empirically delineate to the best of my ability what I've seen, while building technology companies for the past 15 years. The truth is, as I recount my time, that I just haven't seen anything good come of time-based vesting. It's been a long time and I haven't seen the good that is supposed to be there. I'm not saying I've invested money and then checked in with the founders once every month or so, because I haven't. What I am saying is that I have done the work, with groups or alone, building product during nearly 100% of my waking hours for stretches spanning several years. And I've done this while being bound to time-based vesting agreements. I know what the excuse to do time-based vesting, you do it because you “just want to get started and time-based vesting is the easiest way to start”. Though, just because something is easy, doesn't mean it's good or worth while doing. If you want to stop reading here, you're fine. You've already gotten the main take-away and you already know what to do. If you're a founder, don't do a time-based vesting agreement for your startup. If you're an investor, be concerned about investing in a company that has been operating under a time-based vesting schedule. If you're an investor and you just convinced the founders to sign off on a time-based vesting agreement, then shame on you. You should know better. If you're still curious, and would like to know possible reasons "why" time-based agreements are pretty much guaranteed unfold the way they alway do, and would like to see be shown the path from someone who's already traveled this road, then read on. In the paragraphs that follow, I will offer my best understanding of what it is exactly about time-based vesting agreements that makes them so incredibly detrimental to long term growth, and stifles movement like being caught in a bear-trap. Before we begin, let me add some context before we begin by saying this: "The main lie you hear is that time-based vesting is what 'keeps a founder from walking away with too much equity in the company after a few months.' " The truth is, the founder should've never had equity to walk away with if he hadn't earned it yet. #1. Time-based vesting is not capitalism Capitalism is an economic system where goods and services are assigned a perceived value and are allowed to be exchanged in a free market. A free market allows competition, and transactions are meant to be for-profit. If the buyer is to give the seller money or equity of value X, then the seller is expected to return a product of value X. Can this economic system represent founders in a startup company? Yes it can. In startup land, buyers are companies and the sellers are founders. For early stage startups without money, the value is represented by equity. As such, a capitalist economy between company and founder could exist. If you're going to design a company in a capitalist society that operates for-profit, then you might want to make the internal operating agreements principles and practices of your startup coincide with the capitalist ideology. One pre-requisite that might help you determine whether your company demonstrates capitalist ideology, would be to run your company vesting agreement through the following test: When my company gives a founder equity (valued at X), the founder gives my company product (valued at X). If you company vesting agreement passes the test, then congratulations. There's an indication your startup may want to operate for-profit. On the other hand, if you're startup elected a time-based vesting agreement, the previous statement is definitely FALSE. In that case, you have not elected capitalism as the economic system for your startup. You have elected something else. The reason is because, the only thing a founder is expected to give the company in a time-based vesting agreement is their "time". The value that the founder provides the company is irrelevant. And because time-based vesting isn't really time-and-space place vesting, the founder could technically spend all their time in a completely different place altogether on the planet altogether and still vest. There's a funny phrase. It's funny because it's true. It was popularized by a series, which I never watched, that states, "rest and vest".
Dr Sharp helps founders in startups make better deals with their team-mates. This leads to higher levels of moral, respect, integrity and a feeling of being "treated fairly" by setting value-based expectations early and often. If you're thinking about starting a technology company soon, or already have and you're wondering if it's too late to restructure your incentives, then definitely reach out and request your free strategy session today.