Understanding Vesting and Sweat Equity in Nigerian Startups.
When you’re starting a business, few things feel more exciting than sharing the dream with a co-founder. Someone who believes in the vision just as much as you do. You have found someone who shares your vision, passion, and drive. But what happens when that person walks away six months later, still holding 30% of your company?
This is not a rare scenario. Across Nigeria and globally, startups struggle with the consequences of poorly structured “sweat equity” arrangements. The concept seems fair: “you bring the tech, I bring the legal; let’s split 50/50.” Without proper safeguards, it can threaten your startup’s future.
This is where vesting comes in. Let’s unpack the basics and how to protect your business from the dreaded “ghost founder” problem.
What is Sweat Equity?
Sweat equity is ownership given in exchange for time, skills, or expertise rather than money. It is common in early-stage startups with limited cash flow.
Common examples include:
- A developer who builds the minimum viable product (MVP) in return for 20% equity.
- A marketing strategist who joins the team for 10% equity instead of receiving a salary.
While sweat equity rewards contribution, it becomes risky if there is no structure in place.
The Dropout Founder Problem
Consider this scenario:
You and two friends launch a fintech platform and split ownership 40%, 30%, 30%.
Six months in, one co-founder disappears without discussion or handover. They still legally own 30% of the company.
When an investor reviews your cap table, they hesitate. Why does a non-contributing founder still hold such a significant stake?
This can become a serious red flag for funding, decision-making, and team morale.
The Legal Fix: Vesting
Vesting means equity is earned over time and not granted in full on day one. It can be tied to time, milestones, or both. A common approach is a multi-year schedule starting after a one-year “cliff” period.
For example:
- A founder who leaves after six months receives no equity.
- A founder who leaves after 18 months keeps only the equity earned to date (for instance, 5% based on the agreed schedule).
Vesting should be set out clearly in co-founders’ agreements and implemented early. Properly drafted, it is legally enforceable and gives both founders and investors confidence in the company’s long-term stability.
Why Vesting Matters for Your Startup
- Investor Confidence: Prevents “dead equity” from discouraging potential investors.
- Team Morale: Ensures active contributors are rewarded fairly for their ongoing efforts.
- Legal Clarity: Reduces the risk of disputes or uncertainty in the future.
- Clean Exits: Defines each founder’s entitlements from the outset.
What Next?
If your startup has multiple founders or early contributors, address vesting before funding, scaling, or conflict.
Our firm advises startups on founder agreements, equity structuring, and investor readiness. Book a consultation today here on our website or send us an email via lawyers@syntaxlaw.com to get started.
If you have a co-founder, share this article. It might just save your business.
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