Another important question: in what way does the percentage of investor’s shares change in relation to the investment? In foreign legal systems (where we primarily mean Silicon Valley) where the startup ecosystem has been developed for many years now, this question is regulated by so-called vesting – a disposition of using options for acquiring shares in the company, i.e. acquiring rights to a permanent share (percentage) at the company, through time. Although in Serbia, an investment model identical to vesting does not yet exist, there are mechanisms that can produce a similar effect, which could be a very important stimulus for foreign investors to think about the possibility of investing in a Serbian startup. We have covered this topic in our blog – Make your Best Employees your Partners with ESOP.
An example: a vesting period of 4 years if foreseen for the investor, so that after the concluded monetary investment, during these 4 years, they acquire 40% of shares of the company (10% each year). If they give the startup up and quit before the first year is over, they won’t get anything. If they quit a few days after the first year is over, they are left with 10% of the shares. The remaining part of the shares which the investor hasn’t vested (in the first case, 40% and in the second, 30%) the company may buy out that share from the investor.
When it comes to monetary investment, it is important to properly define this type of investment, which becomes more complicated when so-called funding rounds are used, so it requires defining the funding dynamics, as well as rights that are acquired at each phase.
On the other hand, vesting does not have to be specifically tied to a certain time period and depend on monetary investment (which is common for a vesting investor), it can also depend on accomplishing smaller goals (so-called milestones) which is typical for other founders who can also use vesting, and by rule, invest their work and know-how into the startup. Knowledge and experience of the founder is most often the primary motivation of the investor to invest in the startup and the main resource that the founders bring to the startup, so it is not surprising if the investor insists on agreeing upon criteria for evaluating the work of the founders.
On the other hand, this knowledge and experience of the founders likely led to the creation of different intellectual property, even prior to meeting the investor, and it is crucial to specify at the beginning, what will happen with the intellectual property that was created prior to this event, and which the founders are now bringing into the new company. The existence of intellectual property prior to establishing a company, in practice, represents more of a rule than an exception, because mostly (and because of reducing expenses) the company is not established prior to the creation of a so-called MVP (minimum viable product) or prior to the existence of a proof of concept.