Vesting for large group of part-time cofounders

I am involved with a startup that has a very unique structure. We started as friends, all working in our spare time, never intending for it to become a business. Eventually, it started catching on and we have continued to grow over the past few years.

When we officially decided to make it a business, we gave equity grants to everyone involved for the work they put in up to that point. Additionally, chunks of equity (dependent mostly on how much time each person would be able to put in going forward) would vest over time. So, everyone is still working part-time.

Eventually we grew to a point where one of the co-founders became a full-time employee, taking on a lot of the other co-founders' work. Now, most co-founders are involved a lot less than initially intended, and will likely become less involved as we hire other full-timers.

So, we're struggling with the best way to manage equity vesting for all of us part-time co-founders. Additionally, some roles are not viewed as "strategic" enough to merit earning equity, particularly if they are somewhat mechanical and can be hired out. Granted, most co-founders still want to be involved, but have seen their roles diminished over time, and not necessarily their own fault.

How do we balance paying people and earning equity? How do you handle vesting for someone that was only expected to participate part-time, but ended up contributing less than expected (and not exactly intentionally)? Is it possible to say what an "equity earning" project/task is and what isn't? This seems like the perfect example of why you only give equity to full-time co-founders, but we are young and foolish. Fortunately, we have a viable and growing business, and we'd like for it to continue to be such by creating a fair situation for everyone.

Let me give you the tools to answer this question yourself.

There are two types of equity, and two types of contribution to recognize:

1. Equity to encourage and reward future contributions. This is the kind which normally vests over time as you make those future contributions. You split the equity based on the expected contributions of people as the company grows, and if they aren't contributing you terminate their involvement (or negotiate reduced vesting) which cuts off the vesting. Typically you vest over 4 years for full-time contribution, and longer (I tend to say 10 years) for half-time contribution.
2. Equity which is given for cash (or given in lieu of cash to recognize contributions which are interchangeable with cash, e.g., 'x' many hours of contribution of time which has a market rate). This is a fixed number of shares, which is given based on the value of the services and the value of the company. Once you have started to take in external money this is easy: the shares have a known value, you negotiate a value to the services, and I typically recommend you do a two-part transaction: a. you pay in cash for the services, and b. the person paid reinvests the cash in buying equity (which helps you keep your tax obligations straight, because paying in equity is a kind of income for the recipient anyway).

So let's take this back to your situation:

• you have already agreed an equity split, with vesting: if your vesting schedule is slow and steady (10 years for half time), great; if not, then retroactively go back and agree with people that the vesting for 'founder shares' (future contribution) should be some variant on 10 years part time/4 years full time for everyone: this will give the 'founder shares' component of the shares for everyone
• then go to the people whose roles will be reduced moving forward and have the tough 'founder shares vesting' conversation, which is: 'your role is going down; we need equity for other people; let's agree to freeze/slow down your vesting now to be fair to everyone; thanks for all of your contributions'; that will round off the 'founder shares' component of the shares
• now go back and figure out the 'cash component' of the shares. Do this by figuring out what you would have paid in cash for the services people gave: what you would really pay in this situation; then figure out the cash value of the company at various points in time. For instance, you may say, "our company was worth $300,000 four months in (after founder shares were handed out) and shares were worth $0.002/share, and you did $10,000 worth of work, so for that the company would have issued you 500,000 new shares". It will be made up, and you will get something that treats everyone's time contributions on the same basis. This will give the 'cash contribution' component of the shares.
• note that you will need to have an agreement of what a fair contribution of free labor was from all people with founder shares, and the cash component is only for extra work done above and beyond what the free amount expected for the founder shares was.

Do this math for everyone, and you will get the actual number of vested shares they should have today, and the actual vesting schedule moving forward.

By doing this, the challenging points will be reduced to two key ones: (1) figuring out the founder share split on which lots is written here, (2) figuring out the value of the company over time on which I hope lots is also written here.