I remember my first start-up with some friends in college. We had a pretty simple conversation regarding splitting equity, and reached an agreeable figure of 33.3% for each one of us. It was a simple exercise, and not much thought went into it! Later on that year, one of the partners decided to spend a lot less time on the business since it was not gathering traction at the rate he had hoped for. However, he still retained 33.3% of the business! The two remaining partners had a hard time dealing with this, coming up with various schemes to put some sort of structure in place whereby only those who contributed to clinching deals would get a share of the profit. However, it was not as simple as we thought it would be, and was the cause of many arguments, which strained our relationships outside the realm of the business. This is a mistake I made a couple of times before discovering the importance of vesting schedules, and the need to put them into place right from the word go, when incorporating your company.

A vesting schedule comes into play after the partners have agreed upon an agreeable equity split, which needs a lot more thought than a casual conversation on how much everyone thinks they should get! I have written a post on equity splits which may be of assistance to new founders. Once you have a determined equity split in place, a vesting schedule is basically the disbursement of the equity to the founders. For example lets say you have 4 partners with an equal equity share of 25% each. A vesting schedule usually sets a percentage that each partner will earn on successfully staying with the business for a set period of time. The partners may decide that they will disburse equity over the course of 3 years and each partner will get a 33.3% of their equity share at the end of every year. If a partner decides to leave at 1 year 3 months, he/she will not leave with the full 25%, rather it would be  10.4% which he/she could decide to either sell back to the partners or retain.

Each vesting schedule has a unique set of terms and conditions depending on options available to founders, if and when they would like to exit the business, or conversely add more partners etc. Following this process will save founders a lot of stress and frustration when partners decide to leave or disburse equity fairly when one founder is spending more time on the business as compared to another. It is a lot easier however, to have all of these difficult conversations before a business is even formed. However, if experience has taught me anything, it is that, these conversations actually strengthen the team, and deal with a lot of difficult questions straight off the bat rather than saving them for later, when things could potentially become more complicated.