Unvested shares
Let's say a Founder currently owns 100% of the company but wishes to offer 10% of the company to a part-time contributor. He offers a 4-year vesting period to that contributor with a 1-year cliff.
So far, easy enough.
But, how is this constructed practically? He can't offer his own shares as this would be deemed to be personally selling them. Should an option pool be created so that he now holds 90% of the company with the 10% being in the option pool and a quarter of this option pool given to the part-timer every year? But wouldn't that mean that any unvested shares return to the company (which by then may have more investors) and not the founder?
Thanks
2 Answers
You need to create an option pool by creating a stock option program and issue more shares, thus diluting your original ownership. This would be kind of like a "round" of funding. Of course, this all assumes you are a C-corporation and can do that.
The un-vested shares would not be issued and the total ownership (percentage) would be adjusted accordingly.
The pool would still be considered in the fully-diluted number of shares outstanding but if not issued, it would not matter that much.
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Thanks Jarie. What happens if the company has another part-owner? Eg, someone holds financial equity worth 20%. The working founder holds 80%. If you want it to go from 20/80 to 20/70/10 doesn't that mean that you also need to issue shares to the 20% partner so that their holding remains at 20%? Say they have 2000 shares and founder has 8000. Now the 8000 has to be worth 70% (10% in option pool) so 1142 are issued to the option pool and 286 to the 20% holders. Ratio now 20/70/10. But what if the 10% doesn't vest - hasn't the founder effectively given away 10% back to the company? – Stealth 14 years ago
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Sort of. You need to have a pool of stock options that the company owns. The company can choose to issue them to whomever they want. If they go unissued, then there is no real dilution. – Jarie Bolander 14 years ago
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Guess it makes sense. The founder is effectively releasing his 10% to the company, which he is assuming will vest to the new person. Either way, he's letting it go. Thanks again Jarie. – Stealth 14 years ago
First, make sure your other co-owner is ok with offering incentive stock options to a third person.
Then talk to a lawyer that works with startups. He'll knows how to take care of these details and what the options are.
You can alway take a look at StartupLawyer. His articles are very short an concise, maybe they'll help you figure some details out by yourself.
