Demistifying Term Sheets: Part 11 - Founders' Reverse Vesting

Negotiating a term sheet can feel like walking a tightrope, a delicate balance between ambition and protection for both entrepreneurs and investors. Every line of a term sheet carries weight, telling a story about the future of a business. Drawing from years of experience in the VC play, we are pulling back the curtain to highlight what really matters in a term sheet, how both sides should approach it, and the lessons we have learned (sometimes the hard way) to avoid common pitfalls.

In the spirit of transparency, we are sharing a copy of our full term sheet template here.

This article is meant to serve as a guide to navigating term sheet negotiations, highlighting the most critical clauses, and sharing tips for both entrepreneurs and investors. Our term sheet reflects how we do things differently. When our founders Gonzalo Martínez de Azagra and Igor de la Sota set up the fund, they did not just replicate existing VC practices, they built something that truly represents Cardumen Capital’s values.

That said, this guide is not set in stone; it is a living document that evolves as the market changes. But before diving into the details, here is an important starting point: a term sheet is not a promise to invest, in other words, it is not a legally binding document. Even when signed, it is not a guarantee of funding. Instead, it should be seen more as an agreement to keep negotiations private and, in some cases, to pause the company from exploring other offers for a certain period of time.

Now, let us get down to business. While every term sheet is unique, just like every investment offer, there are certain key terms that almost always come up in negotiations. Keep reading to learn what these are and why they matter.

Founders Reverse Vesting

Founder’s reverse vesting is a provision where a founder’s shares in the company are initially subject to restrictions and gradually “vest” over time. The shares are locked up until they earn them by staying with the company for a certain period. If the founder leaves the company before the vesting period is complete, they may forfeit unvested shares (the company gets a buy-back right). The vesting schedule is usually designed to incentivise long-term commitment and ensure that the founder’s interests are aligned with the company’s growth.

Why We Include This Clause

At Cardumen, we view reverse vesting as a way to protect both the company and our investment. As early-stage investors, we are investing in people and their ability to execute the vision over the long term. Founder’s reverse vesting ensures that the founder remains committed to building the company, and that they do not walk away with a significant ownership stake before contributing fully. It also provides a safeguard if things do not work out with a founder, allowing the company to retain equity in cases where a founder leaves prematurely.

Good Leaver vs. Bad Leaver

• Good leaver: A good leaver is typically a founder who leaves the company for “good reasons” such as health issues, family circumstances, or a mutual decision with the board. In such cases, the founder may retain their vested shares and often receive favourable treatment in terms of exiting the company.
• Bad leaver: A bad leaver is a founder who leaves the company “for cause”, such as misconduct, failure to meet obligations, or being dismissed for underperformance. In this case, the founder may forfeit unvested shares and may not receive compensation for the shares they have already earned.

Vesting Schedules

The vesting schedule sets the pace at which a founder earns ownership of their shares:

• Standard vesting: A common schedule is a four-year vesting period, with the founder earning 25% of the shares at the one-year mark (the “cliff”), and the remaining 75% vesting monthly or quarterly over the next three years.
• M&A-triggered acceleration: In some cases, vesting is accelerated if the company undergoes a merger or acquisition (M&A).

Double trigger: If the company is acquired or merged, vesting may be accelerated under a "double trigger" mechanism. This means that the founder’s unvested shares will fully vest if the founder is terminated without cause or if there is a significant change in their role following the M&A event. This protects the founder from being left out of the benefits of the acquisition while ensuring the company’s stability post-merger.

Key Takeaways

Cardumen Insight

We have learned that it is better to prepare for these situations in advance to protect both the company and our investment. As we always say, “The best way to deal with a situation is proactively.” Reverse vesting is one of the key tools we use to ensure that if a founder departs early, the remaining team stays intact, and the company can continue to grow. While we hope it never comes to that, it is essential to plan ahead for all scenarios to secure the long-term success and stability of the business.