Setting expectations in your side project through a simple ‘reverse vesting’ contract

*This is definitely not financial advice. For all I know it could be the completely wrong way to do things*

I’m working on a side project with a friend (with the company formed in the UK). There is a small, but possible chance that it could become a full-time job for one of us, or both of us at some stage. As all projects involving money should, we have tried to set expectations about what could happen in a range of situations. We have set expectations on what each of us will contribute at this initial stage and what that will be worth in terms of equity.

We figured out what we thought the long-term split of equity between us should be (i.e. X% for one, 100-X% for the other). And then we wanted to have the amount of final equity vesting in the project to be dependent on time with the project so if one person decided to throw in the towel then they were rewarded proportionate to their time investment.

An ideal mechanism would be to have our shares vesting over time, but we found out quickly that was prohibitive administratively (we reminded ourselves our job is to build a product customers love, not give ourselves shares in the most optimal way)

So we issued shares in amounts that we thought reasonable for the long run, and we wrote an incredibly short contract:

“If either party stops working on <Company Name> before 1 January 2022, the company will be entitled to purchase a certain number of shares from that party for $0.01. The percentage of shares to be returned is defined as the number of days between 1 January 2022 and the cessation date, divided by 1095.”

We could have also tried to incorporate this intent as part of our Articles of Association but that would have meant we couldn’t use the default Articles and that would have required a fair bit of extra work.

We have no idea if this will hold up, or if we’ve done the best thing possible.

Please leave a comment if you have any better advice!