In a startup, there are just too many things at stake to be ignored and setting up a good vesting scheme is the last that you would like to ignore. Which bring us to the question, what do we mean by a vesting scheme for a startup. It simply is the method that helps you split equity among the startup co-founders, investors and certain employees if so needed in future. It saves you and your company from someone who may just get away with your share. It saves you from potential disputes and maybe, regrets in your life.   

Here is how you can set up a vesting scheme for your startup

Part 1

Founders’ Pie By Frank Demmler

Notice the elements in the table below.

Your next job is to establish the relative importance of the elements by weighing each on a scale of 0 to 10. A tech startup ‘idea’ is fair to be weighed  7 or 8 whereas an idea of a restaurant may be weighed only 2 or 3. Similarly, a business plan may weigh less if the founders themselves are putting in the money by themselves. Same goes for other matrices too. 

In the table below, you got to fill the columns as per the individual founder’s contribution to that field. One who brought the idea to the table can be given 9. One with great industry connections can be assigned a better on the scale than other for this matrix

Let’s take a hypothetical scenario and see how things turn out. Read the tables below and analyse.  

The relative importance of the elements

Relative contributions of the founders

Now, when you have a fair idea of the equity split, let’s learn about the second step which is vesting scheme. 

Part 2

If you are unsure about the risk-taking capabilities of your co-founders and fear that they might leave the relay in between, leaving you helpless, then you are not wrong to think like that. Setting up a vesting schedule is very important. You can not just your co-founder walk away with 20% of company share if he/she chooses to quit too soon.

Here is how a vesting schedule for a cofounder number 2 from the above table may look like. 

He/she has 44.2% of the company on paper, right? Unfortunately, that founder decides to leave the company or get fired within a year then as per your designed vesting terms he/she walk away with nothing. After the one year point, you get 25% of your stock and every month after that he/she gets an additional 1/48th of their total stock. This way they only earn all of their stock at the end of four years. Clean and clear, right?

Through the vesting scheme, you decide you can also understand what happens if an advisor, a board member or a co-founder is added later to the team.

Main Image: © Pop Psychology

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Before we jump to when and what for, lets put a light on the question “why attorneys at all?’’

Public interest lawyers work for the greater good of society and for individuals who are in need of legal assistance whereas a startup needs one when looking for a ‘value-driven’ solution for a specific problem it is facing. Focus your attention on the word ‘value-driven’. A lawyer might not just save you from getting sued for an accused infringement but also advise you on how to get things done legally to run a successful business that will save you money.

Do you know Mukesh Ambani-controlled Reliance Industries spent ₹ 1,187 crores on legal expenses in one financial year (2017-18)? Infosys Ltd did ₹1,043 crores while Kotak Mahindra Bank spent ₹823 crores.

Chandubhai Mehta, the managing partner of law firm Dhruve Liladhar and Co, recently said, “There is a degree of maturity among domestic companies and they have understood that good legal services don’t come cheap and the cost of not complying is now very huge.”

Now, you need not worry about such big numbers but it is wise to take care of things from start. One day you do plan to go big? Though it is important to understand that you would need a certain domain expert lawyer as per the requirement is. A General Corporate/M&A lawyer may not be a fit in Intellectual Property creation who may not be a perfect fit in case of a Private Equity/VC expert lawyer or when you need a Litigator. You will need a specialist for each domain and when you do so, it is wise to go with a reliable firm that host expertise in each domain. 

Now let’s go through a few things that would help us understand at what stage a startup might need an attorney.  

Company formation

Company formation basically includes what business structure (such as Sole proprietorship, One-person company, Partnership company, Limited liability company or a Private limited company) best fit your needs. You do not need a lawyer (or a firm) or hire an accountant unless you have investors pumping the money right at the start. If so is the case, the equity rights need to be sorted there and then. 

You can read about different business structures in India here. 

Founders Agreement

A founders’ agreement is a legally binding contract, that outlines the rights, roles and responsibilities of each owner in a business. It basically consists of vesting scheme and confidentiality (Business Concept and Technology) terms and conditions. 

IP creation

A lawyer will help your startup register its products and services for copyright and trademark protection. He would be there to save you from an accused infringement of intellectual property by your competitors.  

Staff

An attorney will help design a good standard employment agreement that will state the rights, responsibilities, and obligations of both parties during the employment period. Is it important? Yes. It would carry salary benefits, work schedule, restriction on confidential information, vacation allotment and termination policy (for e.g. ‘At-Will” Employment). 

Regulation

If your startup lies in the domain that is going through high disruption more like cryptocurrency or some fintech startup then you should not wait for a moment and start looking for the best attorneys.  

Angel/seed funding

A lawyer can help you evaluate your offer, negotiate your deal and make sure you comply with all requirements. A startup lawyer will help you understand the investment contracts and terms that you might not be familiar with. Only when you understand things you will be able to make the most of it.

Business Licenses

Business licenses can vary from simple tax registrations, a trade license or shops and establishment registration, manufacturing and export-import to labour and employment-related registrations. It will be wise to align these things with your attorney so you follow the norms and save yourself from costly legal suits and fines. 

Vendor contracts  

A vendor contract documents the terms of your agreement with your vendor. Marketing contracts, content supply agreement, distributorship agreements and advertisement agreements all fall under vendor contracts. An attorney will know the “how to’s” and intricacies of a vendor contract and will help you run a successful business. 

Conclusion:

I hope by now you must have got a fair idea of whether you need an attorney or any legal advice for your startup or not and when you will absolutely need one. It all depends on where you are in your startup lifecycle but you do need one at some point in time. Over to you. 

Main Image: ©HBO Entertainment

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