Becki DeGraw on founder vesting, advisor equity & the 4-term-sheet play

This Week In Startups is made possible by: Wilson Sonsini: https://www.wsgr.com/en/ Today's show: One of YouTube's three co-founders left for grad school and walked away with a fraction of what his partners made on the Google sale. Becki DeGraw of Wilson Sonsini joins Jason for Startup Legal Basics to explain the vesting schedule behind that gap, and why you want one even if you never take a dollar of venture money. Learn how VCs actually respond when a founder says "I've already put in four years," and the exact language Jason gives founders to turn one term sheet into three. PLUS, why is an inactive advisor still vesting your equity, and who wrote those performance milestones? Guests: Becki DeGraw on LinkedIn: https://www.linkedin.com/in/rebecca-degraw-639bbb62/ Wilson Sonsini: https://www.wsgr.com/en/ Relevant Links: Becki DeGraw — partner in WSGR's San Francisco office — https://www.wsgr.com/en/people/becki-degraw.html TechCrunch broke the YouTube story— https://techcrunch.com/2006/10/09/google-has-acquired-youtube/ Sequoia Capital — https://www.sequoiacap.com/ Roelof Botha — led Sequoia's YouTube investment and later ran the firm globally → https://en.wikipedia.org/wiki/Roelof_Botha ESOP / employee stock option pool — https://thisweekinstartups.com/basics Founder & advisor equity documents — https://www.wsgr.com/en/services/practice-areas/corporate/emerging-companies.html Timestamps: 0:06 Becki DeGraw on why founder equity is "near and dear" to every founder 1:53 Founder vesting explained 3:49 Why you want vesting even if you never take VC money 6:05 "Why do I have to vest again?" 7:32 Leverage is a function of how many offers you have 10:36 The exact script for landing a second term sheet 14:37 Don't let an AI write your three-page vesting schedule 18:19 Character in Silicon Valley: it's a small world after all 19:49 Take the emotion out of it Subscribe to the TWiST500 newsletter: https://ticker.thisweekinstartups.com Check out the TWIST500: https://www.twist500.com Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp Follow Lon: X: https://x.com/lons Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis Check out all our partner offers: https://partners.launch.co/ Great TWIST interviews: Will Guidara, Eoghan McCabe, Steve Huffman, Brian Chesky, Bob Moesta, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland Check out Jason's suite of newsletters: https://substack.com/@calacanis Follow TWiST: Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups Substack: https://twistartups.substack.com

• 0:06Speaker 00

  All right, everybody. It's my favorite time of the year. I get to do Startup Basics. What is Startup Basics? Very simple. There are things you need to know that are simple and basic, but they're important. They're foundational in being a founder. And if you get these things wrong, whether it's accounting, product market fit, sales, or legal, they can have downstream effects that you will then spend 10 or 20 times the effort to clean up than if you had just known your basics. We keep all of these at thisweekinstartups.com/basics so that you can remember. And Becky DeGraas back with me. She's from Wilson, Cincinnati, Goodrich, and Rosati. We call them WSGR here in the

• 0:47Speaker 00

  Valley. And we're going to talk today about founder and advisor equity. Becky, welcome back to Startup Basics.

• 0:56Speaker 01

  Thank you. It's good to be back. And I always, always love chatting about this stuff. And this is a fun one. This is always near and dear to our founders' hearts. So.

• 1:05Speaker 00

  Yes. So let's get started here. A founder starts a company. They don't want to be on the venture track. So they're a company. You and I start. Becky and Jason Enterprises, and we're building software. All good. You own 50% of the shares. I own 50. Probably you'd own 41%. I think you probably can't negotiate me. I own 49% of the shares. And here we are. We're in business. We got all our shares on day one. We're rocking and rolling. We make a bunch of money. But at some point, you come back to me and say, hey, you know, I got this venture firm. Acme Ventures wants to put a bunch of money in. And now we have to reset the vesting of our shares, and we have to have a whole nother discussion. And then they want an employee stock option pool and ESOP. What's that?

• 1:48Speaker 00

  So let's take it like we do here on Startup Basics, from first principles, from the basics. When you're on the venture track, there is founder vesting. What is it? How does it work? Why does it exist?

• 1:59Speaker 01

  As a founder, you buy your shares. You own your shares on day one. You get all the voting rights associated with the shares. But investors want to know that you're going to stay with the company. So we put a vesting schedule on those shares so that they vest over time. What does that mean? If you were to leave the company before the shares are vested, the company has a right to repurchase the unvested portion of the shares. And usually it's at the lower of whatever the original cost was that you bought those shares at, or the current fair market value. For a founder, if you're buying your shares at the earliest of days, we're hopefully at the point where we can say, these shares

• 2:39Speaker 01

  are worth a thousandth of a penny per share. You want to write a really low check to buy those shares. So the cost, right, is nothing. And the company has the right to repurchase at that cost if you leave before the shares are vested. As you said, if you're going to go out and seek any type of institutional funding, particularly from DCs, you're going to have to have vesting on your shares. These are what we call the golden handcuffs, okay, for the offenders. And it makes sense in those early days, right? When investors invest in a company at the pre-seed, seed stage, even at the A stage, there probably isn't much there at the company level. It's really the founders, their ideas, their vision,

• 3:22Speaker 01

  that the investors are excited about and putting their money in, which means the investors want to make sure that those individuals are staying at the company to execute on that vision. I would also say that even if it's just you and I, and we're doing this venture, and we're going to backstop it, we're not going to take that VC money because there's all the bells and whistles that go with it. There might be a reason, I would argue, to include vesting to protect amongst the founders themselves, right? If you have two or more co-founders, one of them turns out, maybe they're not pulling their weight, or they decide, whoa, this startup stuff is crazy. That's not, that's not exactly,

• 4:07Speaker 01

  it looked like it was fun. This isn't what I had in mind. Or one of them gets lured away by some big comp package that one of the tech giants is throwing out. You don't want them walking away with fully vested stock owning 50% of the company, right? So even if, even if you're not going to pursue investor money, you may want to think about it to protect each other. And I hear this all the time.

• 4:34Speaker 00

  You want it to be fair, right? You want it to be fair.

• 4:36Speaker 01

  Yeah, both people get it.

• 4:37Speaker 00

  And we have this incredible illustrative example of this. There were three founders of YouTube. Most people say, oh, yeah, you know, I remember Chad Hurley, and then there was Steve. Who's the third? And it was a really smart gentleman named Javed Karim. I've met him a bunch of times. Really smart, really thoughtful. And when he, this was 2006, 2007, he went back to school. He wanted to go back to Stanford and finish up. Okay, so he only got one-fifth of his founding shares. And the company was bought like a year or two later by Google famously for 1.6 billion in stock, in Google stock. And

• 5:19Speaker 00

  so Chad and Steve got 330, 40 million dollars each. He got 64 million, a fraction, a fifth.

• 5:28Speaker 00

  Now, if you had kept that, and you didn't sell those Google shares, if, in other words, if Chad and Steve hadn't sold their Google shares, and who knows, maybe they didn't, maybe they did, I don't know. That's about a $10 billion outcome. And for Javed, it's like 2 billion. So these numbers matter. These are very real numbers. And, you know, it's, listen, I don't think anybody's crying for somebody becoming worth hundreds of millions or billions of dollars. It's an incredible payday. But this is why it matters. This is why the basics matter. Not just when you grow the company and it becomes profitable, you raise money, but then they sell. And then what if that sale is in equity? Oh, my

• 6:10Speaker 00

  Lord, these have compounding upon, compounding effects. Like I said, Becky, in the intro, get it right, folks, from the beginning. So what are some blowback from venture capitalists? When a founder says, well, I've been working on this for four years. Why do I got to do another four years? I'm willing to do two. Is that a reasonable counter? And how do VCs typically take something like that?

• 6:36Speaker 01

  Yeah, I think it depends on where the company is at. Like, what have you done in that four years? You know, if you're now a Series B company, and you know, you're, you've got real revenue, you've got real metrics, you're on your way, we're probably not going to have a conversation at all about your vesting. But if you've been working on this for four years, and this is your first priced round from first institutional investors coming in, why did it take you so long to kick this? It's kind of, I understand that you might have vested, but we're really at stage one. It just took you longer to get to stage one than it did some others. So I think that that's often how investors are going to see it is, how much further do I have to go? Right? Because it doesn't, it kind of doesn't matter.

• 7:21Speaker 00

  So if you boot trapped to 3 million a year in revenue in three years, okay, that's interesting. Great. Yeah, maybe we have a discussion about vesting is two years or three years, or one year, whatever it is, or no vesting. Also, life is based upon the number of offers you have. A person can have multiple offers, and then these kind of nuances can suddenly become negotiable when they weren't previously negotiable. You've seen this up close and personal, and you have to. When there's multiple offers, you got to sit with the founder and say, okay, this is a unique opportunity for you. You have four term sheets. These are the differences. Walk me through, not a specific instance, obviously, you can't do that for confidentiality, but make me, paint me a

• 8:05Speaker 00

  picture, if you will, Becky, of what you would say to a founder with four different offers, dealing with these kind of issues.

• 8:12Speaker 01

  Yeah. I mean, one, you're sitting in a great spot. This is exactly, that your best opportunity to get the best terms is leverage, FOMO, right? Everybody has it.

• 8:24Speaker 00

  100%.

• 8:25Speaker 01

  Somebody else is interested in this? Oh, three other people are interested in? Guess what? My best offer, I can do better. Right? So you want to be able to be strategic about how you do that. You also don't want to burn bridges, because as we all know, this ecosystem is small.

• 8:42Speaker 00

  Still small, even as big as it's gotten. It's still small. Yeah.

• 8:46Speaker 01

  It's still small. People talk. People are always going to talk. So you don't want to burn bridges. But that doesn't mean you can't be strategic about trying to get the best terms for what you're doing. So, you know, balancing that. But then it is, you know, going through and looking at the terms and figuring out where the differences are, and where you might be able to have levers to pull. You know, I often say, and founders, some of the early-stage founders are like, well, valuation, I'm just going to pick the one with the highest valuation. Maybe.

• 9:15Speaker 01

  But there might be other things to consider too, right? Um, in terms of who is it? Like if they're going to take a board seat, most often in these early stages, that term sheet is going to be coupled with, I want a board seat too. Who is it that's going to sit on the board?

• 9:27Speaker 00

  Yeah.

• 9:28Speaker 01

  How valuable are they going to be to you? Are they going to show up and not read anything before? And, you know, not be very helpful? I don't know. Is that better than somebody who is like going to roll up their sleeves? Going to be in there, going to be helpful, going to be making introductions? Like they've got your back. You have the same vision, right? Like, maybe that would be more valuable in the long term. What opportunities does that fund? Have to continue funding the company? Does this say, I can write one check, but then I'm out?

• 9:57Speaker 00

  Well, this is such a good point, Becky. Cause now you have the leverage to ask these questions, to even be able to ask without being nervous as a founder with one term sheet. When you got those four sitting there and you say, hey, you know what? I've got four term sheets. I just want to be straightforward. We're going to take a week to make this decision because sometimes there's a little pressure. Hey, this term sheet is going to explode. I can tell you, when you've got four term sheets, ain't nothing exploding. You can say, we're going to make our decision on the 15th. Today is the fifth. We want to really make a thoughtful decision. And yeah, if you want it to be exploding, then I guess I'm choosing between three. So even that concept goes away. And then all of a sudden you're left with the ability to ask questions. Hey, I want to have a follow-up meeting. Okay, great. By the way, they're coming to you now. They're coming to your office. They're going to come on your time and they're going to bring two partners with them.

• 10:42Speaker 00

  So everything qualitatively changes. That's why we really try to get founders to, when you get that first term sheet, please try to get a second or third. And the way to do that, we give them language. And this is basic language. Hey, we met twice. Um, we just got a term sheet. We're considering options. We want to do our due diligence. Wondering if you'd like to get together and just get an update on the business? I can come to you anytime, 6:00 AM to midnight. Just let me know where and when I can get you updated in 20 minutes. If you say it like that, how does that sound? How's my, how's, how's my?

• 11:17Speaker 01

  I want to, I want to meet for coffee this afternoon. Let's go.

• 11:19Speaker 00

  Let's go. And I'll meet you anywhere. See, this is where like, I think we really have to give specific language to founders at this early stage. I like to give them that, don't get nervous, just tell them honestly. And I could use your counsel. If you ask for advice, you get money. You ask for money, a lot of times you get advice is one of those nuances. And when I had Sequoia invest in my company, let me tell you something. You get a big, big firm with a great reputation. I got four, three, four offers after that. I didn't know how people knew I got an offer. And I had funds asking me, can we meet? Uh, we would like to give you a better offer than Sequoia. And I was like, okay, how did you know I have Sequoia? Oh, well, you know, everybody talks to your previous one. Everybody talks.

• 12:03Speaker 00

  There's a lot of talking going on. And I, what I said to rule off at the time was, listen, I've got an offer. That's a third more because you signed this term sheet. And they offered to fully vest me. And he said, okay. And I said, none of that matters to me, but since I got three offers that are a little bit more, um, would you be able to go up like one or two million? He's like, okay. And can we, okay, can we close today? Cause I just don't want to be going back and forth over and over again. I said, that's reasonable. He, he met me, you know, a third of the way or something. And I was like, okay, I'm good. I want Sequoia. I don't, I don't want like, you know, maybe this firm will be Sequoia if I make them successful. So now let's move on to the situation of advisors.

• 12:45Speaker 00

  Uh, now that I'm a successful investor, I get offered advisor shares all the time. Uh, but I don't have time for that. And I, it's not really what I do. But there is this advice out there. Get it, get some advisors. Um, that can help your credibility. But then there's this other side of like, am I just giving you a free equity away? And what if this person promises me they're going to talk about me on their podcast? Social media, introduce me to everybody, help me get patents, whatever. And they don't actually do the work. So fuck it about advisor agreements. Like, do these actually help? And if they do help, how are you supposed to structure them in the most basic fashion?

• 13:24Speaker 01

  I have seen companies give out advisor grants like candy, right? It's like, oh, I'm, I've got this advisor, that advisor, this advisor. And now I have 10 of them. And even if you're only giving away a quarter percent, maybe a half a percent for somebody that you perceive to, you know, give, um, greater credibility. But are you maximizing the value of those advisors? I think is what it comes down to. You know, you can, um, you can add performance, uh, based vesting instead of just purely monthly vesting, um, onto advisors. If you go that direction, I would say you want to use a very simple, very clearly defined milestone, not subjective at all.

• 14:08Speaker 01

  Anybody could pick up and read this and say, yep, that has been met or no, it has not been met. You put ambiguity around it of like, you do a good job. No, that's not, that's not, that's not a good milestone, right? Um, you, you, you have any ambiguity, whether the milestone has been met or not, you now have ambiguity on your cap table, which investors don't like. So you just want it to be really crisp and clear. Um, I would also caution about not going to over complicate things, you know? Um, literally just the other day I got a like three-page performance vesting schedule

• 14:44Speaker 01

  that was clearly written by the AI model of their choice and was way too complex to where I'm like, I can't even understand this.

• 14:54Speaker 00

  Machines aren't exactly ready to give you the best advice ever. I mean, better than a Google search sometimes.

• 15:01Speaker 01

  Sometimes, right? But in this situation, I was like, this is not the way to go. Um, you know, you, so you can, you can, if you can boil it down to like, what is the value that you really want from that advisor? If they were to do X, if they were to deliver on Y, is that going to be the value that you're hoping to get? That's going to help you do whatever it is, give you the credibility within an industry, open up doors, get you access to customer base, whatever, whatever it is that you're hoping to get. Be really clear about that objective. And if they hit it, great, they, they vest. The other alternative, right? If you don't want to necessarily get into that, or you're having a hard time agreeing on it,

• 15:41Speaker 01

  or maybe it's a little more wishy-washy in terms of, I can't concretely say, I want two introductions to these five folks or whatever it is. You can use simple time-based vesting. The thing to keep in mind with that is just be active about taking a look at it and saying.

• 15:57Speaker 00

  Then it's on you, right? As the founder to check in and be like, hey, you know, we've been doing this for 12 months and you were going to introduce us to a bunch of investors and customers and that hasn't happened. So maybe it's time for us to wrap this up. Obviously you're too busy or you just have your lawyer send him a note. Hey, we're going to discontinue this agreement. Um, if you want the details on it, you can go talk to Jason.

• 16:19Speaker 01

  Exactly. Right, right. Like advisor agreements typically have anywhere from a seven to 14 day notice period. Meaning if you're a founder, you're staying on top of it. You can, probably in the first couple of months, maybe, maybe it is a little leeway, but at a certain point, it's like, ah, three months have gone by, six months have gone by and I haven't gone anything. You can terminate that relationship and you can get back, you know, your, your equity and not let it set out there. But you've got to actually send a notice. We get that all the time too. Oh, they stopped working for us a year ago. Okay. Did you send any notice? Well, no. Okay. Well, there's still vesting then, is how most of the advisor agreements are drafted. Unless there is an active termination, it just continues, which means they've been sitting out there.

• 17:04Speaker 01

  You think you're not using them, but they're still, they're still earning their equity.

• 17:09Speaker 00

  I had this situation happen to me. I had a founder years and years ago said, hey, I want to give you 1% of this new idea company. You've been an inspiration. Here's what I want your help on. I did all the help. And then, uh, this VC joined, looked at the thing and convinced the founder that we needed to cancel this. He cancels it. I call him, I said, okay, your firm beep, we'll bleep it out here. I said, this founder and his name, I said, I told, I told the founder like, why would you screw me? Like I've done all this work for you, whatever. He said, well, he told me and it's not in my hands. He's the board. And I just told the guy and I emailed the founders of the firm. I said, just remember my name, Jason Galleganes. I don't know what I'm going to be able to do to earn this 1% back,

• 17:50Speaker 00

  but every founder who mentions your firm's name to me for all time, I'm going to tell them in detail this story. So are you comfortable with that? And they did. And you know what? There are three or four deals that they probably are not in now because I said, I'm going to, put it on record here, tell that story and let them make their own decision. And three out of, I think probably three out of three times, they just went with the other deal. Cause they're like, yeah, this is a, this is an issue of morality and basic ethics and doing what's right. Why would you try to screw somebody else trying to help the company? Bleep out the name, please, but I'll keep it a little spicy here. That's why behaving at the highest character level matters in Silicon Valley. Always be on your best behavior, be your best self.

• 18:33Speaker 00

  And if you're not your best self, all this VC would have sent me some, you know what? I regret doing that. I'm sorry. And I would have been like, okay, I'll stand down. Now to this day, we're sitting here 15 fricking years later. I'm still perturbed by it, Becky. It's like one of the few times I, I ever, somebody ever screwed me. And it was like, wow, this really feels bad. This makes me feel bad. Uh, and for no reason, no reason.

• 19:00Speaker 01

  Yeah. Back to it's a small world. Don't burn bridges.

• 19:05Speaker 00

  After all, speaking of Disney, you and I were just talking about Disney. All right, listen, character matters. Always be on your best behavior. If you make a mistake, hey, you, you can own it and like, maybe you could, uh, make it right, you know? It's always, it's the opportunities here. Given how hot the market is right now, this is also when you start to see baby people get a little bit chippy. What's the best advice when you're dealing with this as a founder? Things are getting intense. Just broadly speaking, what's your counsel to founders when everything starts getting intense and the investors all want more equity in your company? And they want you to screw the other investors? Or, you know, it just gets very intense like

• 19:48Speaker 00

  this. How do you counsel founders for dealing with that high level engagement that can happen? When people see a cap table and say, "Oh, my Lord, I gotta get more of it."

• 19:59Speaker 01

  I would say the first thing is take the emotion out of it. The emotions are the worst. Like, "I can't believe it. Like, this person did this or said that." And then all of a sudden, it's like, "Okay, what are we even talking about? Do we know what the issue is here?" Emotions, first, try to like, just get everybody to calm down a little bit.

• 20:17Speaker 00

  Yes.

• 20:17Speaker 01

  And I am always reminding clients of, we said, I don't know, five, 10 times now, it's a small world. All these people are gonna talk. Like, however you handle yourself today in this situation will be remembered more than the, you know, last 10 board meetings you did, or other conversations that you had with them, if it appears to be kind of a more aggressive behavior, or even perceived that way. So, you know, taking a step back, understanding it. Oftentimes, it's, okay, if you can't do that, like, I can help by providing talking points of how you can approach it, what you can say, what you should try

• 20:59Speaker 01

  to avoid saying. But if the emotions are too high, it may be, okay, well, businessperson, you don't have the conversation. Just have the lawyers have the conversations. We can just talk about it and not have those emotions tied to it.

• 21:12Speaker 00

  See?

• 21:13Speaker 01

  And really get to the bottom of it, sometimes.

• 21:15Speaker 00

  This is what I should have done in my situation.

• 21:17Speaker 01

  People agree. It's not that, they're not that far apart, when we can actually have the conversation sometimes.

• 21:25Speaker 00

  This is what I should have done, Becky. I should have called you. I should have let my emotions calm down. And I should have let you just write that little email, like you did for me in the other situation. That was later, and we worked that one out. Because I calmed my emotions down. I said, "Let's not take this personal." And I went to you and got a little spicy, and we'll talk about the situation. But you cleaned it up for me. And this is where having the right partner matters. That's why Becky is my partner, Wilson Cincini, WSGR.

• 21:55Speaker 01

  Thanks, Jason.

• 21:56Speaker 00

  This week in startups.com/ basics. Thank you, Becky.

• 21:59Speaker 01

  Thank you, thank you for all the time, Wes.

• 22:01Speaker 00

  Hey, listen, it's just, you've been very strategic for me. And you can, I'm an emotional person. Most founders are. A lot of people get into this. They have big emotions. That's part of the superpower, right?

• 22:15Speaker 01

  It's a baby.

• 22:16Speaker 00

  Yeah, and it's your baby. And that's why having good counsel, good attorney, you know, you got a good accountant over here, just good counsel to say, "Okay, what is the goal? What is the actual goal here? Let's work towards that goal. And let's take the emotion out of it. And let's give you the tools you need to get there." Becky, thanks again.

• 22:33Speaker 01

  Thank you, thank you.