Venture Capital Term Sheet: Founder and Employee Stock Restrictions

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What are the restrictions placed on founder's stock?

Many sophisticated venture investors will ask that the shares held by founders and employees be subject to forfeiture upon departing the company, but with specified percentages becoming vested against forfeiture over time. There is no set custom on this; where you come out will depend in large part on your relative bargaining strength with the investor. Even in cases where the founders have previously imposed some type of vesting schedule on their stock, the investors may require the schedule to be modified and acceleration provisions to be reset. The addition of these provisions will typically involve the founders entering into individual stock restriction agreements with the company as a condition to closing.


What are common vesting terms of founder's stock?

If the founders are subjected to a vesting schedule, there are a number of ways it could be negotiated to lessen its impact. For example, the vesting might cover only a portion of your shares; the vesting period might be relatively short (one or two years); you might receive credit for prior performance; and the repurchase right might only arise if you voluntarily terminate your employment or if your employment is terminated for cause. In the event the founders have previously subjected the founders stock to vesting terms, some investors will simply continue the vesting (or modify it in some capacity). However, generally an investor will want to ensure that the length of vesting is adequate to ensure that the founder is incentivized to continue with the business for a set period of time, typically between three and four years.


What types of acceleration can be provided for vesting?

One important item that is oftentimes negotiated in founder and employee vesting are acceleration provisions. Acceleration is primarily discussed in cases of a change of control, an event such as a merger or sale. In the event of a change of control event, usually two different approaches to acceleration are discussed: o "Single Trigger." In the event of a qualified change of control (the trigger), the options held by the founder or employee will be accelerated. In some cases, all option will be accelerated or a portion may be accelerated. o "Double Trigger." This acceleration is triggered when (1) there is a change of control event, and (2) the employment of the individual is terminated without cause. o Combination Approach. In this case, a portion of the options may be accelerated in the event of a change of control (say, 25% of the unvested option) and the remaining options will be accelerated upon a termination following a change of control (the Double Trigger).


Other types of acceleration provisions

In some cases, acceleration may also be given in the event of termination of the employee without cause (not in conjunction with a change of control event), to prevent a scenario where members of the management team are terminated by the board of directors in order to bring in a more seasoned management team.

Additional Resources

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