This document is a long form co-founder agreement intended for use by the founders of a new startup who wish to provide for some level of claw-back of a co-founder’s initial shareholding if he or she:
- ceases to work for the company (whether as an employee or contractor); or
- fails to make the contribution required of them to the business.
This type of arrangement is referred to in the startup and venture capital world as “founder vesting”.
Founder vesting is common with Silicon Valley startups, and is becoming more popular in New Zealand as co-founders are increasingly meeting through incubators or accelerator programmes rather than through longstanding business, professional or social relationships.
The approach taken in this document is to provide for progressive vesting of a co-founder’s shares over a set period (e.g. 36 months). If the co-founder leaves the company or fails to make the required contribution to the business during that period, the company has the option to repurchase unvested shares for the price originally paid by the co-founder for those shares (which will usually be nil, if the shares were issued on incorporation of the company).
Silicon Valley vesting agreements most commonly apply only if a co-founder leaves a startup before the end of the agreed vesting period (i.e. they do not have “expected contribution” provisions). However, Californian startups invariably take advantage of at will employment contracts allowing them to fire staff (including founders) without cause or compensation, meaning it is generally not necessary to deal with expected contributions in vesting agreements. I.e. if a co-founder is not performing, the company can fire them and cancel any unvested stock without the need to justify cancellation on contribution grounds.