@Basil,

As one recently joined a startup I may say that it would be tough to comprehend your idea. I agree with the ReallyNewCo syndrome premise but ain’t sure that 50/50 is an obvious solution, certainly not for hired employees (how do you explain that a fire/layoff is not due to a desire to safe but poor performance?) . For founders I’m missing how you protect a committed partner who after 3 years got ousted (CEO whose startup overgrew him) and if you don’t why his factual success (overgrown startup) leads to the penalties. If the only basis for the 50/50 split is to avoid the RNC syndrome then wouldn’t it be prudent to increase the founders’ cliff to 2 years? I’ve read your blog scrupulously and admit that the build-to-flip idea seems quite special to me so may be the 50/50 protection is only pertinent for that type of startups?

Thanks for the discussion!

There are many times in the affairs of men when we can know something, but be unable to prove it. At times, most of us literally bet our lives on things we believe but cannot prove. For the class of high growth, tech companies I describe in my writing, I believe that is the most fair vesting formula and that it maximizes returns for both the entrepreneurs and investors. Best regards, Basil

Your vesting schedule is neither wrong nor inappropriate. It’s a thoughtful alternative. My issue is with the claims you make about its superiority and the superlatives you use to market it to entrepreneurs.

You are doing some good writing here and this is a very important topic.

I was a little taken aback by your comment:

Basil, unless you can show some data as opposed to “estimates” to prove your point, it’s hard to believe your claim that the “50:50 formula is the most fair and gives the company the best chance for success.”

I sincerely believe this to be true. I have done my best to describe the group psychology of why this is the most fair formula on my blog (www.AngelBlog.net).

But of course there is no way to prove this – how could it be proved? If you can think of a way, I’d be very grateful.

On the former, it’s hard to say that a vesting schedule is unethical. A vesting schedule simply is. It cannot be retroactively changed. It’s out there for any employee to discover and make decisions on. Someone can make a decision as to whether they want to work at a company or not based on their vesting schedule. Having a “poor” vesting schedule, relative to what’s common in the market, is no different in principle than having below-market salaries at a company. If you don’t like it, don’t join the company.

I would consider it unethical if a company whose vesting schedule is substantially different from what’s prevailing in the market at any point in time does not disclose that to people who are about to be hired. I also do believe that everyone in a company should be more curious and better educated about the various documents they are signing and agreements they become parties to.

Perhaps you should read what I wrote again. I don’t suggest that penalizing people who’ve worked for years at the company is OK. I was simply describing what Basil’s proposed vesting structure would do in a number of cases. Some may think this is terrible. Some may think it’s OK because everyone who joined the company knew what the vesting schedule was.

As for my personal opinion on Basil’s vesting schedule, it’s simple: I don’t think it’s fair in most cases. It primarily makes sense in the case of build-to-flip companies where there is an agreement between investors and founders/employees that the team must stay together through exit. Even then, note that it is the founders and employees who bear the majority of the risk. To make the situation more fair in that case, they’d have to get above-market grants.

Last but not least, I’m not sure from your description how it was vesting schedules that caused the efforts of the long-time employees to be valued at less than the efforts of new management. Typically this happens with recaps + asymmetric option reloads or with acquisitions where the buyer pays a lower price for the company but gives above-market packages to key players.

Smells like spin to me.

The choice of vesting schedules has profound effects on real people. Kids get to go to college or not. People get to make down payments on homes or not. Have retirement savings or not. You appear to suggest “penalizing people who’ve worked for years at the company” as if this is OK? An acceptable neutral position?

IMO, this would be reprehensible in (almost) every set of circumstances. If each and every long-term employee had not been successful finding every way to build the company over the years, mgmnt should have terminated them long before. But if they built the company, it’s craven to short change them for “new friends” the CEO/mgmnt team has acquired towards the end before the sale (who may share zip code, alma mater, or social class or skin color).

It means the management team has had them (long-term employees) working in typical deprivation start-up conditions for years under false pretenses (that there was a fair reward at the end). Pulling the rug out from under them at the end also means that management was happy to benefit from their dedication while letting them live in a distorted reality (the thought of a fair disbursement of proceeds).

As might be obvious, I have lived through a start-up where contributions of the long-term employees were devalued when a global company acquired the firm, while the potential contributions of a new management team were wildly overvalued. It was a devastating betrayal of a team who built a medical device.

At least we live in a democracy and I was able to visit my local Congressman, write an OpEd and otherwise speak out about the
self-serving decisions made in boardrooms of private companies.
Thanks for another chance to let people know that employees are not powerless pawns in any inventor’s/investor’s/senior manager’s chess game.