When a VC sends you a term sheet it will typically include a clause about the operating founder’s equity vesting over time.  This means that the founders of the company will not have rights to some or all of their equity stakes until they earn it by working with the company for a period of time.

This seems backward to some new entrepreneurs.  How can they lose the rights to something that they already own?  There is, however, good reason for the vesting clause.

When an investor backs a company, he is betting on the management team as much (if not more) than the idea or technology.  Ideas and technologies don’t become companies on their own – entrepreneurs make that happen.  Imagine a scenario in which, shortly after a VC invests several million dollars, the management team quits knowing that they have an equity stake in the company.  The investors would be left to pull together a new team and face losing their investment.

The objective of this clause isn’t to cheat the founders out of their equity. Remember, the good VCs want key operators to have sufficient equity. Rather, the clause is designed to ensure that the founding team has an incentive to stick around and build the company – putting forth the effort that was promised to the investor.