The founders of a venture and the investors in it have a unique collaborative – and sometimes conflicting – relationship.
Both want the venture to succeed. The founders see themselves as the creative force moving the business forward. They want it to succeed because of the substantial payoff that can result to them.
Well, most ventures have been in existence for some time and are already operating at some level before they seek independent third-party investors. So, the founders see their equity positions as “earned' through the work they've already put in. But the investors want “insurance” that the founders will maintain their focus now that they have the investors' money in hand.
Frequently, this concern is expressed by the investors in a demand for “vesting” of the founders' equity positions. The idea is that a founder who leaves the venture must give back some of his or her equity if employment by the venture doesn't continue over some vesting period, usually from two to four years.
Not surprisingly, this investor demand is viewed as over-reaching by founders who may already have used their own savings, credit lines and credit cards to get the venture to where it is at the point presented to the investors. How do investors and founders resolve this conflict?
It's a matter of careful analysis of the contributions both founders and investors have – and will – make, their relative bargaining leverage and a frank discussion of the parties' needs. It helps to have a counsel who has assisted other founders to have these conversations. If you find yourself in this position, or just forming your venture, please call our office for a complimentary conversation about your options.