Allocating Stock in a Startup

I just read About Stock, a really useful article on allocating and distributing stock in a startup.

The article covers how many shares to issue, founders stock, setting aside stock for investors or options, what to do when you add employees later or a founder leaves, and capitol structure after an investment.

I found this bit of wisdom to be useful:

One way to deal with that (and it's something an investor is likely to insist on) is that all founder stock purchases will be subject to a buy-back provision (part of the stock purchase agreement between each founder and the company).  Basically this means that the founders do purchase and own their stock, and can vote the stock.  But if the founder leaves the company (by either their choice or the company's choice) in some period of time (4 years is typical) then the company has the right to purchase back some percentage of the stock at the same price the founder paid for it. 
For example, let's say a founder owns 20% of the company, and the company's buy-back provision states that 20% of each founders holdings are not subject to buy-back, but for the first year after the purchase, 80% of a founder's shares are subject to buy-back, for the second year, 60% is subject to buy-back, the third year, 40% is subject to buy-back, and the fourth year, 20% is subject to buy-back.  After a full four years, there would be, in this example, no buy-back right remaining.  This is basically a 4 year "vesting", but it's actually a declining buy-back right, as opposed to a vesting. 
So what does that mean?  Let's say that founder left the company after 6 months.  Under that arrangement described above, he or she retains the 20% of the original 20% ownership (i.e., 4% of the company) because that "vested" up front.  The company has the right to buy-back the remaining 80% of that founders 20% ownership (i.e., the company buys-back a 16% share in the company).  So the founder ends up owning 4% of the company.
I worked at a startup, and had a significant equity stake subject to buy-back. It vested 25% each year. When I left after six months, I lost all of that stock. I should have negotiated for 20% vested immediately, and 20% vested each year afterwards. Now I know for the next time around.

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