Is an investor of a startup subjected under a vesting schedule?

Question

I have never invested and I'm so confused with what the startup has told me. They are my friends and I trusted them so I didn't do thorough research. (I know I know) They've cashed my check already, but as I read more, I started to have more questions. Please help!

I'm both an employee and an investor of a brand new startup. At the time when I invested (or agreed to give $ for equity) neither a product nor a demo was ready. However the valuation jumped 10 fold since the first investor put in money. They explained that the earlier investors carried more risk at the very beginning and when I invested, the product was half way done. Say, the first few investors received 10% for 25k and I received 2% for 10k. Let say the company gives me 4% equity share as an investor and 1% of the employee pool. Is that a reasonable jump when the product was not even finished (no demo was shown whatsoever?) I invested for the idea pretty much (like the earliest investors).

Recently, I asked about what the company valuation is and how many shares does my 4% represent. CFO told me that there is no point to talk about "shares" or "stock" since the company is not public. Is it right?

I asked if my investor portion equity will be subjected under a vesting schedule, CFO said yes. That doesn't make sense to me, because I bought those 4%? Aren't those supposed to be fully vested? I agree to my employee equity to be vested.

So confused... please help. Thank you in advance!

-Beth

Answer 1

Recently, I asked about what the company valuation is and how many shares does my 4% represent.CFO told me that there is no point to talk about "shares" or "stock" since the company is not public. Is it right?

No, it is wrong. Shares and stocks exist regardless of how they can be traded. Once a company is formed, there are stocks that belong to the owners in the proportion of the ownership. They may not exist physically, but they do exist on paper. As an owner of 5% of the company, you own 5% of the company stocks.

I asked if my investor portion equity will be subjected under a vesting schedule, CFO said yes. That doesn't make sense to me, because I bought those 4%? Aren't those supposed to be fully vested? I agree to my employee equity to be vested.

Doesn't make sense to me either, since your money is already in their pocket. But I'm not sure if its illegal. If that's what is written in the signed contract - then may be its possible to have that situation. But it doesn't make much sense, because these shares are granted to you in return to your money, not some potential future work (as the 1% employee's portion). You already gave the money, so why wouldn't they be vested?

Best to read the contract upon which you gave them your money, I really hope you have at least that and not just gave them a check....

Answer 2

As a start-up, the initial shares can be given at various price points.
So essentially they can give someone a larger percentage based on the same amount earlier, and lesser percentage to someone else for the same amount.
As its a start-up the valuations can be very tricy and what matters is that whether you believe the percentage you got for the amount is right or not.

It is very important to note that when you have been given an ownership in the company, how that is designated. Is it in absolute number of shares or is it in terms of percentage based on the existing shares. For example you maybe given 100 shares, without any qualification. Or you maybe given a 5% stake in the paid-up capital, that translates to 100 shares.

It is always better to hold the shares in % of the total shares. Also read the contract, any dilution should require your approval.

Normally start-ups once the valuation starts to go up, start creating more shares and sell these to private equity or create more shares and give it as a bonus to promoters. Hence in both cases your holding will keep getting diluted. There is a related quesiton If a startup can always issue new shares, what value is there to stocks/options?