A few years ago, a friend of mine founded a startup with a long-time colleague who was a great salesman. It turned out that the Web 2.0 business my friend was running didn’t actually require those sales skills and so after a few months he had to let this person go. That could have been a really difficult if the two of them didn’t already have an agreement in place for what part of the company the salesman owned, and what would happen when he left. Vesting of shares is used as part of a contract to agree upon ahead of time what shares people earn each year and what happens if they move on to something else before the term of the contract.

This is the more negative side of vesting – to protect. You’re probably familiar with this. But the other side of vesting – to motivate is also very important.

The value of a startup is more in its potential than in its reality. It is the hard work of a group that transforms that potential into something that has real value. The key ingredient in the process is the team: a core group of people that works on the problem for a long time. It can take a while to go from an idea to satisfied customers and income. And you can’t afford to keep bringing in new people to finish what others started. You need a team that will stick together to build a great site and keep generating quality content for a blog. Or who will design, build, test and maintain a winning software product.

One way to get people to stay for a while is to motivate them financially to do so. The most popular scheme used, in Silicon Valley startup culture, is vesting to reward over the long run. Most people are familiar with how option vesting or 401K matching works. Your employer gives you a reward, but you can’t take it home right now; you have to work for a fixed number of years before it is completely yours.

All Fair Projects have this mechanism built in. You can assign a fraction of the profits and the decision making to someone. But if they leave before fully vested, they must give back a part of their share. The standard vesting period in high-tech companies is 4 years. This means that after one year, 1/4 (one quarter) of the reward is yours to keep and nobody can take it away. Such a long vesting period makes sense for a business, but it might not make sense for your project. It depends on how long it takes to develop it, and how long you want people to stick around. A two year vesting period, for example, might be appropriate for bloggers.

Vesting is good for everybody involved. You can work confidently because all your colleagues are also incentivized to stay for a long time. If somebody could walk away and still receive 30% of the future profits, they have a smaller incentive to stay.

Also, humans are competitive by nature and also value fairness. We don’t mind being poor, so long as everyone is poorer than we are. In the same way, nobody likes to know that they have to work for 2 years to get what somebody else will get after 2 months. Which is why everyone in a Fair Project vests over the same amount of time.

Finally, without vesting you might be much more weary of adding new members to your project. Vesting limits the risk of trying new members. That is, you can add new members but if they do not become productive members, the group can vote them out. This is never an easy decision (so make sure you’re bringing the right people, a subject we will discuss in a future blog entry!) but at least you know that there is a mechanism to do so without the person who left still benefiting as if they had stayed.