Business Equity Contract Structure - Clarification needed

[LucyLu33]

What does "retain" mean?
What does "will earn" mean?

Retain means keep from the beginning.
Will earn means earn as you go.

As I said, the end result would be the same after 5 years. Other than that, you ARE asking questions in a vacuum and the devil is in the details.

Yes, the devil is in the details, and I'm trying to understand all the details. Feel free to add context so it's not in a vacuum, so I can better understand the scope involved in the question I am asking. The end result would be the same after 5 years - the cofounder would own 12.5% equity in the company AFTER 5 years. But DURING the first five years, if there are payouts, there would potential be a difference in monetary gains. Correct?

 

[LdiJ]

Yes, the devil is in the details, and I'm trying to understand all the details. Feel free to add context so it's not in a vacuum, so I can better understand the scope involved in the question I am asking. The end result would be the same after 5 years - the cofounder would own 12.5% equity in the company AFTER 5 years. But DURING the first five years, if there are payouts, there would potential be a difference in monetary gains. Correct?

You are the one who needs to add context.

 

[Zigner]

I get what you are saying Tony. I understand that maybe I am not adding crucial details. I don't know enough to put it in the context you are looking for. Since it's a hypothetical situation, can you add a scenario to put it in context and then comment?

THAT'S where that "Tony" went - I was sending an email and the recipient's name never showed up. Now I understand why!

 

[LucyLu33]

THAT'S where that "Tony" went - I was sending an email and the recipient's name never showed up. Now I understand why!

Haha! So I take it you are not Tony!

 

[LucyLu33]

You are the one who needs to add context.

Throw me a bone here, LdiJ! What context am I lacking here? Specifically.

 

[LucyLu33]

THAT'S where that "Tony" went - I was sending an email and the recipient's name never showed up. Now I understand why!

And here I thought we were on a first name basis.

 

[PayrollHRGuy]

Tony who the hell is Tony?

 

[LucyLu33]

Tony who the hell is Tony?

PayrollHRGuy, I can’t do your homework for you. You’ll have to figure that out for yourself.

 

[Taxing Matters]

What is the difference between a contract that states the cofounder gets 12.5% equity total fully vested over 5 years (2.5%/year), and a contract that states that the cofounder starts at 0% equity and gets 2.5% equity per year for 5 years for a total of 12.5% equity? How do these contracts differ in terms of payout during the first 5 years?

The first is not particularly well worded, which is an open door for litigation later if the parties disagree over it. However, very generally the term "vests" tells you the point at which the benefit is guaranteed and cannot be taken away. So the first one may well result in a situation in which the co-founder has to stay the full five years to be guaranteed to get his equity; if he leaves before then he may forfeit all of it. The second, by contrast, simply gives him outright the 2.5% each year, and once given cannot be taken away. In either case if he stays the full five years he gets the 12.5%. It's what happens if he leaves during the 5 years where the outcome may be different. Of course, the other provisions of the contract and other evidence of intent may affect the outcomes, especially the first one. These kinds of contracts need to be very carefully drafted to ensure that the result the parties want is the result they actually get.

 

[LucyLu33]

The first is not particularly well worded, which is an open door for litigation later if the parties disagree over it. However, very generally the term "vests" tells you the point at which the benefit is guaranteed and cannot be taken away. So the first one may well result in a situation in which the co-founder has to stay the full five years to be guaranteed to get his equity; if he leaves before then he may forfeit all of it. The second, by contrast, simply gives him outright the 2.5% each year, and once given cannot be taken away. In either case if he stays the full five years he gets the 12.5%. It's what happens if he leaves during the 5 years where the outcome may be different. Of course, the other provisions of the contract and other evidence of intent may affect the outcomes, especially the first one. These kinds of contracts need to be very carefully drafted to ensure that the result the parties want is the result they actually get.

Thank you so much for your intelligent answer! (Seems that everyone else on here is just playing games.) So, if I may further this example (though poorly worded, I know - feel free to make suggestions ) to make my point as to the differences that I am potentially envisioning between the two scenarios I am trying to describe.

We have two scenarios:
SCENARIO A) a contract that states the member gets 12.5% equity (upfront), but vested over 5 years (2.5%/year) for a total of 12.5% equity
SCENARIO B) a contract that states that the member starts at 0% equity and gets 2.5% equity per year for 5 years for a total of 12.5% equity

Say the company is an LLC that becomes profitable in the second year, and the members decide to do a distribution at the end of 2 full years. In Scenario A after 2 full years, the member would still get a distribution of the full 12.5% into some type of equity account, though the member could not access the full amount of money until after 5 years. Whereas in Scenario B after 2 full years, the member would get a distribution of 5% that is fully accessible. In the end, assuming the member stays for at least 5 years, Scenario A would be a more lucrative option because the member would not be shorted on distributions during the vesting period. To your point, a real contract would need to worded properly and more clearly than my non-business self is able to articulate here, but do you understand the point I am trying to make here? Is my assessment of the differences in these scenarios correct?