In the last post, we had discussed the right to purchase the shares by matching the offer. This is called the right of first refusal (ROFR). As a co-founder, this helps when someone in your team leaves and tries to sell her shares in the secondary market. This is a good right to have but often insufficient because a) this does not prevent the sale of shares and b) Exercising this right requires you to buy at a higher price and might not be the use of cash as a startup (that’s why you should have Transfer Restrictions as discussed in the last post)

You will often find this right in the term sheet because an existing investor would want to prevent ownership dilution during the subsequent rounds. Given that multiple groups have ROFR we need to have some preference order. Usually, the right is first with the company/promoters and then the investors.

Next, we have is the provision for accelerated vesting - Accelerated vesting allows gaining access to shares/RSUs/ESOPs at a rate faster than the standard/initial vesting schedule. For example, one good use case is when acquired by another company or when going public, employees become fully vested (So if you’re working at a startup, you might want to check with the founders if such a provision exists! )

So after your startup has been incorporated, you might want to have the document(s) that cover the following

  • Role and responsibilities of the co-founders
  • Founders’ equity split (Day 2)
  • Founders’ vesting schedule (Day 2)
  • Transfer restrictions and ROFR (Day 3+4)
  • Non-compete and confidentiality clause
  • Provision for accelerated vesting (Day 4)
  • Employee Option Pools (to be covered in next post)

Usual disclaimer: Discuss with a lawyer for professional advice