Sharing ownership can be a powerful motivator for many. Today, we explore equity grants, covering common terms, and discussing important considerations.
Here are some common terms that you should know and start thinking about:
- Vesting Schedule: Think of the vesting schedule as a roadmap to ownership. It charts the gradual release of ownership over time or upon achieving specific milestones. This mechanism ensures that as contributors continue to invest time and effort into the startup, their ownership stake aligns with their ongoing commitment.
- Equity Percentage: The portion of the business granted. It’s that simple.
- Cliff Period: Initial period before vesting begins. Before the vesting schedule kicks into gear, there’s an initial period known as the cliff period. Think of it as a grace period where no ownership is granted. This feature safeguards against short-term commitments, ensuring that those involved are genuinely dedicated to the startup’s success.
- Acceleration Clause: You may want to consider granting acceleration under specific circumstances. Life is unpredictable, and business is no exception. An acceleration clause in the equity grant agreement allows for the rapid release of ownership under specific circumstances. Whether triggered by a significant milestone or unforeseen event, this clause provides flexibility in recognizing and rewarding exceptional commitment.
- Rights and Restrictions: Every ownership journey comes with its set of privileges and limitations. Rights and restrictions associated with the equity grant outline what that equity holder can participate in, influence, or expect from their ownership. Oftentimes these terms are included in your Founder’s Agreement and when vesting occurs, the rights and restrictions in the Founder’s Agreement more than likely apply.
Here are things to watch out for:
- Vesting Period: Make sure the vesting period aligns with your startup’s growth trajectory. Aligning this timeline with your company’s milestones ensures that ownership distribution is a reflection of ongoing dedication and value that individual is creating.
- Rights and Restrictions: Clearly defining the expectations and limitations tied to the equity ensures that all parties involved are on the same page. Open communication on these matters is essential.
- Acceleration Triggers: Identifying circumstances that may lead to the acceleration of the equity grant is crucial. Whether it’s achieving a revenue milestone or facing unforeseen challenges, having clarity on these triggers allows for proactive decision-making.
- Legal Counsel: Seeking legal advice is not just a precaution – it’s a necessity. A comprehensive equity grant agreement, meticulously crafted with legal expertise, safeguards the interests of both parties and lays the foundation for a successful partnership.
Navigating these terms and considerations ensures that the path to success is not only exciting but also mutually rewarding. Remember, clarity, communication, and legal guidance are key!
Tricia Meyer is a serial entrepreneur, business lawyer and mom of 6! Tricia is the Founder + Managing Attorney at business law firm, Meyer Law and Co-Founder at The Clever Baby. At Meyer Law, Tricia has helped thousands of companies from startups on Shark Tank to growing companies on the Inc.500 list to some of the largest, well-known companies in the world! The Clever Baby recently launched its first product Jet – a patented, innovative teether and dispenser all-in-one, and is committed to developing clever products for parents and creating magical moments for babies and kids. Tricia is passionate about entrepreneurship and has mentored thousands of companies at incubators and accelerators across the United States at 1871, TechStars, WeWork Labs, and more!
