Answer
Jul 19, 2016 - 01:59 PM
It is taken as a given by many founders that their grants should be subject to a 1-year cliff before the initial vesting point, i.e., for a 4-year vesting schedule, no vesting would occur until the first anniversary of the grant, at which point 25% of the grant would vest and then typically the remainder would vest monthly pro rata at 1/48 th per month.
Some founders simply hold strong views that no one should vest in a company’s equity unless and until they have made at least some really significant contribution and therefore believe in using a cliff in all cases without exception. That is of course their choice (though note the potential IP problem this may create as noted below).
For most cases, however, there is absolutely nothing wrong with using a 1-year cliff but only if the founders are also getting paid some form of cash salary during the cliff period. If they get no salary, and they do not reach the first vesting point, they can find themselves having worked for up to one year with absolutely nothing in compensation to show for it.
This of course raises fairness questions. But, more to the point legally, it also means that any IP-related work the person may have done may wind up not belonging to the company even if there is a formal contract assigning it. Why? Because, if the person got paid nothing, there is no consideration given in exchange for the IP assignment and it fails. This leaves the now departed founder potentially as the owner of such IP with the company having (likely) no rights to it.
Established organizations such as Y Combinator will routinely use a 1-year cliff as a screening device to make sure that only the founders who stay with a venture get to keep equity in that venture. However, because YC provides seed funding to its companies, it is customary for such companies to pay their founders some form of salary even in the earliest phases. In such cases, there is legally nothing wrong with using a cliff for founders and, presumably, there is nothing unfair either. That is not the case if no one is getting paid salary.
And, of course, it should be noted that employees who get option grants after VC-funding are routinely subjected to 1-year cliffs before their first vesting but, again, they are getting paid along the way and so the legal and fairness concerns do not arise in such a case. Option arrangements may be regarded by some employees as unfair but not because of the cliff. That part people understand and it makes sense. So too with founders when they are paid along the way but not otherwise.
So, to sum up, since most founders do not get paid in the early phases, use of a 1-year cliff for founders should be the unusual exception and by no means the rule. This is a founder call but that is my view as a lawyer who has long worked in this area and who has seen it all many times over.
Some founders simply hold strong views that no one should vest in a company’s equity unless and until they have made at least some really significant contribution and therefore believe in using a cliff in all cases without exception. That is of course their choice (though note the potential IP problem this may create as noted below).
For most cases, however, there is absolutely nothing wrong with using a 1-year cliff but only if the founders are also getting paid some form of cash salary during the cliff period. If they get no salary, and they do not reach the first vesting point, they can find themselves having worked for up to one year with absolutely nothing in compensation to show for it.
This of course raises fairness questions. But, more to the point legally, it also means that any IP-related work the person may have done may wind up not belonging to the company even if there is a formal contract assigning it. Why? Because, if the person got paid nothing, there is no consideration given in exchange for the IP assignment and it fails. This leaves the now departed founder potentially as the owner of such IP with the company having (likely) no rights to it.
Established organizations such as Y Combinator will routinely use a 1-year cliff as a screening device to make sure that only the founders who stay with a venture get to keep equity in that venture. However, because YC provides seed funding to its companies, it is customary for such companies to pay their founders some form of salary even in the earliest phases. In such cases, there is legally nothing wrong with using a cliff for founders and, presumably, there is nothing unfair either. That is not the case if no one is getting paid salary.
And, of course, it should be noted that employees who get option grants after VC-funding are routinely subjected to 1-year cliffs before their first vesting but, again, they are getting paid along the way and so the legal and fairness concerns do not arise in such a case. Option arrangements may be regarded by some employees as unfair but not because of the cliff. That part people understand and it makes sense. So too with founders when they are paid along the way but not otherwise.
So, to sum up, since most founders do not get paid in the early phases, use of a 1-year cliff for founders should be the unusual exception and by no means the rule. This is a founder call but that is my view as a lawyer who has long worked in this area and who has seen it all many times over.
Add New Comment