I think vesting is a good idea for the founders (it's in their best interest), but I think if you're asking for someone to commit to such a long time period (ie 4-5 years), then it better be really good equity. Even better than if it were just offered "up front." There are also opportunity costs to consider, so your early employees or co-founders could be off starting their own companies with a lot more equity. So it's probably going to vary by each person, but in my experience, the vested equity has to be really good or I'm not interested.

I've been in startups where the vested equity was really low, and I left (I was employee #1). I've also talked with numerous people who thought about joining the same startup, and refused due to a number of reasons, but low equity was mentioned as one of the first reasons.

How about reverse vesting instead of normal vesting? This may alleviate some of the tax consequences of someone that wants to leave early.

http://www.joelonsoftware.com/items/2007/07/17.html

I'm curious - how does this compare with the buyout agreement detailed here: http://news.ycombinator.com/item?id=35192. Do you need to have both vesting and buyout provisions, or is vesting preferential to buyouts, or do you not need vesting with a sane buyout policy?

Would it be possible to "open-source" an operating agreement so that we can actually work these things into our own?

We've thought of open sourcing some of YC's documents. The reason we haven't so far is that they're still getting tweaked. Which implies the earlier versions had holes. And the prospect of having other people use legal documents with holes is a lot more alarming than other people using software with bugs. I.e. we might get sued-- if not by benevolent founders, then by their evil investors.

Isn't this analogous to using open source software in a setting where bugs in the software might result in financial losses -- i.e. is there not a "NO WARRANTY, USE AT YOUR OWN RISK" clause that you can attach that is strong enough to shield you from any potential liability?

If you can get the legal angle sorted out, I'd personally find these sorts of documents useful. As for waiting for a version without "holes", that sounds like waiting until the software is perfect before shipping it :) It's not like a theoretically "bulletproof" set of templates would stop anyone from suing you anyway, if some company tanks and the investors are looking around desperately for someone to blame...

I think that disclaimer will be there anyway, so YC's concerns aren't about getting sued but about causing more harm than good.

That's an interesting idea -- I would imagine that there's a lot of commonality between the legal paperwork you need for most early-stage startups, and when differences exist, they can often be parameterized reasonably well ("$a founders, $b equity pool, $c shares per founder, vesting according to schedule $d", etc.). Putting some common templates for this kind of paperwork up on a wiki somewhere would be useful, I think.

This is a great post. Something we were just considering in our own startup. Since we are just starting out it is easy for us to just brush it aside with our optimism, but really anything can happen, so after reading this post I am sold on doing it.

A side note, the book Founders At Work is an awesome read!

Who owns the stock while it vests, the company? As far as percentage ownership for decision making (if that even matters -- I don't now), how does that work?

It's no different than with fully vested options that have not been purchased: the company. I think you are confusing vesting with purchasing options. First, you get the options. Then, you vest into them. Finally, you purchase the shares. Until you purchase, the company still has them.

that's supposed to be "know" not "now". Though technically I do not now own a significant percentage in anything incorporated :-P

Thank you Jessica - a very powerful argument for biting the financial bullet and using real lawyers when setting up a startup with stock vesting. I hadn't actually thought about vesting as an issue before for the founders (as my partner and I are decade long friends)

This is one of those ideas that sounds good when you apply it to everyone else.

Personally I want to own my shares immediately. You never know what's going to happen and what technicalities will let VCs/the board/others fire you before you're vested.

that's what the double trigger is for

I still wouldn't trust the small print not to taketh away. Typically it involves something like accelerated vesting as long as you're not fired "for cause"; but who's to say what kind of charges might be trumped up to get around it? In which case, you'd want a clause covering departure for any reason -- but then you might as well be vested from the start anyway.

My cynical side remembers doing all the grunt work for 18 months at my first startup and then getting sacked to free up my unvested stock for the hopeless flotilla of "key hires" who proceeded to sink the company.

Excellent point. On a related note how does one legally manage vesting in the case of a merger between two startups? I'm considering a merger with another founder. My startup has been around for a little longer. Any thoughts?

Bottom line you have to assign a value to each entity, then it's a trivial matter equalize the shares for all the shareholders.