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Share Vesting 101: An Introduction
When a venture capital firm is considering an investment opportunity, they want to make sure that all shareholders are aligned and motivated to build the business. They use the vesting mechanism to achieve this goal. By gradually releasing ownership interests over time, vesting ensures that the founders and management team remain committed to the business and their economic interests are aligned with the growth of the company.
The post-money valuation of a VC investment opportunity is not fixed, and it depends on various factors such as expectations and risk models. If the founders’ shares were fully vested immediately after the financing, it could create a “special” post-money valuation that might not reflect the actual value of the business. This could be dangerous for the VC syndicate, whose investment is significant, while the business is still mostly just an idea.
Moreover, vesting mechanisms also offer flexibility in case a senior member of the management team departs the company. In such cases, unvested equity entitlements can be recycled into a new incentive structure for a replacement individual who will expect a market-standard equity remuneration package.
Overall, VC firms use vesting mechanisms to build a strong community of interest between the fund and other shareholders in the investment. The vesting period aligns the…
