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Reasons to give out equity through vesting schedules

Operations & Management

Joshua Davidson wrote this article

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Let’s share one of the most infamous founder stories of all time.

Robin Chase and her partner at the time, Antje, decided to embark on a new venture together and begin a company. They wanted to avoid any drama and decided early on to make a deal to split the ownership of the company down the middle, 50/50. This company turned into the very profitable, growing, eventually public and well-recognized company called ZipCar.

Sounds like a success story right? After all, the company ended up being worth millions.

Within a year and a half of the company being founded, Antje left the company with 50% of the equity. Antje never gave her weight in the company. She worked another full-time job while it was being founded, had a few children, etc. Meanwhile, Robin was working every minute of the day, not taking a paycheck, handling everything from the day-to-day to the bigger picture. Yet, when it was all said and done, they both maintained the same amount of ownership to this large sum that was ZipCar.

Antje never gave her weight in the company. She worked another full-time job while it was being founded, had a few children, etc. Meanwhile, Robin was working every minute of the day, not taking a paycheck, handling everything from the day-to-day to the bigger picture. Yet, when it was all said and done, they both maintained the same amount of ownership to this large sum that was ZipCar.

This is a big deal.

You can have the greatest intentions early on with giving out fair equity, but you also need to fully comprehend early that priorities change, and perhaps even more importantly, promises made today need to be kept going into tomorrow.

So what can we, as founders, as entrepreneurs, as CEOs of growing companies needing to hire employees do? Are we hopeless here?

Are we hopeless here? No, of course not.

Vesting schedules are something that everyone reading this post should consider. Vesting is exactly what it sounds like, a form of investing. You’re putting in the work and as long as you do, the dividends of that will pay out.

For example, in my very last company, while working at Chop Dawg, we created a vesting schedule for everyone on the team. Each calendar year that passed, as long as nothing was changed regarding the working relationship and/or stopped working all together, a set percentage of equity in the company was given to the founders. If they left early, or our roles changed, we would reevaluate and see what was fair. When a set amount vested, it was theirs forever, to do as they pleased.

Why is this a big deal? Using the ZipCar story above as an example, we all have the best intentions early on, but when it comes time to put in the work, not everyone will back that up with results. It is critical for us as founders, executives, even employees to understand the magnitude of giving a percentage of our own companies to someone else. This isn’t the same thing as just being paid a few extra dollars a month.

Here is the thing… vesting schedules can and should be fair. You should be upfront to all parties about how it works, how it will vest, and if known, the total lump sum that it’ll end up being. If they put in the work and deliver, they get the total amount. Even have clauses in place for protection that no one is ever fired “last minute” for no apparent reason, except just to lose equity. Take the necessary precautions to protect your employees, other stockholders and even yourself.

Vesting shows the commitment to the long term. That as a team, everyone is working together for something bigger than themselves.

Vesting can even work for employees. Bringing on early employees with stock options? Again, make it vest. Each year that passes up until a certain amount of years, a certain amount of equity is given. You can even make it milestone based, profit-sharing based, etc.

We need to be more open about all of the options that exist in the world of business for startups, enterprises, companies, employees, even founders. We don’t need to be situations that are never fair, unreasonable… or worse, situations such as what happened with ZipCar. By being open, having transparent dialogue, working together, all having the same goals for the longterm, we can create better companies, better situations, better circumstances and more often than not, better results.

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