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When Should they get it? > Why Use Vesting Schedules? - Pg. 16

First Steps 16 When Should they get it? After deciding each founder's share of the company, you should consider the timing of actual transfer of ownership. Frequently, the ownership agreement (see the "Ownership Agreements" section later in this chapter) will state that founder-employee stakes will vest over time, meaning that, while the entire amount is allocated to the stakeholder, he will only gain full legal ownership to the stake after a certain period of employment. Example: Devco, Inc. is a corporation with four founders who plan to share the equity (stock) equally. Founders A & B will be contributing services, Founder C will contribute cash up front. Founder C, since he has performed his contribution, receives ownership of all of his stock. Founder A, because he has a very prestigious name in the industry, will be receiving part of his stake free and clear and part subject to straight line vesting . Founder B will receive his stock subject to a modified cliff vesting schedule. According to the schedule, each will get Founder Signature of Shareholder's Agreement 100% 10% 5% End of Year One -- 22.5% 5% End of Year Two -- 22.5% 10% End of Year Three -- 22.5% 40% End of Year Four -- 22.5% 40% C (fully vested) A (vests at the end of every month) B (vests at the end of every year until Year Three; monthly vesting for Years Three and Four Why Use Vesting Schedules? The idea behind vesting is to defer delivery of ownership until the grantee has delivered all of the