Designing Reverse Vesting Terms for Common Holders Facing Series A
Reverse vesting subjects fully issued common shares to investor-mandated repurchase options that unvest equity over a renewed service calendar.
Series A terms
Meaning
The collection of financial, protective, and governance provisions established during the first institutional venture capital round of a company. Negotiation of series A terms dictates the future division of ownership and control between founders and institutional investors. These provisions typically include the valuation of the company, the size of the option pool, and board representation rights.
They set the legal framework that will govern all future investment rounds.
Governance Shift
Protective provisions often give investors veto power over major corporate actions. This means that founders can no longer sell the company, change the share structure, or issue debt without investor approval. It marks a transition from unilateral founder control to collaborative oversight.
Dilution Effect
Institutional rounds require founders to issue new preferred shares, reducing their personal ownership percentage. This dilution is accompanied by an option pool expansion, which further reduces the founder’s share of the company. It represents the primary non-cash cost of securing institutional growth capital.
Liquidation Preference
Investors protect their downside by requiring that their invested capital be returned before any payments are made to common shareholders. Under standard terms, this preference ensures that early investors are paid first in a sale or liquidation. This structural term reduces the risk for external capital providers.