What happens to the shareholding of a founding team member in case he decides to quit the company?

Ideally, the founder’s shares should vest over a 3-4 year period. This is not just in the interest of the investors, but also protects the entrepreneurs in case one of them decides to leave.

In simple terms, if there is a 3-year vesting period, then every month the promoters get 1/36 part of their equity.

For example, if there are 4-founders, and one of them who has 18% equity decides to leave the startup after 15 months because the venture faces significant challenges, then in a 3-year vesting period clause, the leaving founder will get to keep only 7.5% of his 18% equity, with the rest of the equity now available for the company and the board to offer to another person who may be brought in as a co-founder or at a management level to fill in the gap left by the leaving founder.

In case the equity that has not vested to the leaving promoter is not given to a new person, then in the case of an event like a M&A that equity is distributed to all the remaining shareholders, including the promoters in the proportion of their holding in the company.

 

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Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

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