Meaning
An informal agreement among co-founders defines how ownership of the venture will be earned over time without being formalized in a legal contract. This unwritten vesting schedule relies on mutual trust and verbal commitments rather than binding legal documents. It creates a major risk of disagreement if a founder leaves early, as there is no legal mechanism to claw back their unvested shares.
To protect the company, founders must convert these verbal understandings into written contracts as soon as possible.
Conflict Generation
When a founder departs from a company that has no written agreement, they are legally entitled to keep all of their issued shares. This situation can leave the remaining founders with a heavily diluted shareholding and a departing partner who holds a large portion of the company but no longer contributes to its growth. The resulting deadlock often makes the company uninvestable to external venture capitalists.
It can lead to expensive legal disputes and the potential failure of the business.
Resolution Mechanism
Resolving a dispute over unearned shares requires a negotiated settlement or a restructuring of the company’s equity. In some cases, the remaining founders can use corporate share issuance to dilute the departing partner, though this can be subject to legal challenge. In other cases, they must purchase the departing partner’s shares at an agreed price.
Governance Standard
Institutional investors always require a formal, written vesting agreement before providing capital. This requirement ensures that all founders have a clear, binding commitment to the venture over the long term.
