The Founder Reciprocal Equity Exchange (FREE)

I’m open-sourcing a legal document that I use: the Founder Reciprocal Equity Exchange (FREE). The FREE allows two founders to swap small amounts of their personal equity. Through cashless equity exchanges, founders can "invest" in each other's ventures, building a network of incentivized peers and a diversified portfolio of equity holdings. The FREE deal solves many issues with alternative approaches, like angel investing or advisory roles.

You can download the FREE here.

Key Features: 

• Cashless: The FREE agreement is a cashless share-for-share exchange, making it accessible to founders who lack the time or money to build a portfolio of angel investments.

• Independent Transactions: FREE deals are one-off and one-to-one, meaning a founder can enter into a new FREE agreement without affecting prior equity swaps.

• Personal Shares: The FREE uses shares from each founder’s personal equity stake, meaning FREE deals are non-dilutive to other equity holders like co-founders, employees, and investors. This also means that co-founders can do FREE deals independently. 

• Founder’s Maintain Control: The original founder retains voting rights of the exchanged shares, as well as legal proxy and power of attorney. This ensures that each founder keeps their decision-making power within their own company.

• Flexible Timing: The FREE is not tied to fundraising rounds or valuations. Founders can execute a FREE agreement at any mutually convenient time, regardless of whether a round is oversubscribed or closed.

• Customizable: Founders can customize equity amounts based on company stage or valuation. For example, a seed founder might offer a 5:1 exchange to a series-A founder.

• Long Vesting Schedule: The agreement has a seven-year vesting schedule by default, aligning with typical startup timelines. Vesting terminates if either founder stops working on their business, meaning you get back most of your shares if the other founder isn't in it for the long haul. A FREE deal is a commitment to the long term, not a get-rich-quick scheme.

• Acceleration (optional): Vesting accelerates on a sale or IPO. The acceleration can vary depending on the scale of the event. By default, a $10M or less sale triggers 25% acceleration, a $10M-100M sale triggers 50% acceleration, a $100M-$1B sale triggers 75% acceleration, and a $1B+ sale or IPO triggers 100% acceleration. These values can be customized, or acceleration can be removed entirely. 

The FREE document was written by Jim Jenson at Wilson Sonsini. You can download the agreement here.

Why would anyone want to do this? 

As a founder, you inevitably encounter other great founders and awesome products. You’d love to get involved, but there isn’t a clear way to do so. You might want to invest, but it’s too expensive, or they aren’t actively fundraising. You might be tempted to join in an advisor or employee role, but you need to stay heads-down on your own company. 

The FREE deal offers founders a simple way to participate in other startups while avoiding distractions like angel investing or advising. It actively discourages distraction: the best way to provide value to the other founder is to grow your own company (increasing the value of the equity you gave them), not by working on theirs. 

While there are no formal advisor obligations, FREE deals help founders build a community of peers. There are things that you can only learn from active founders: the growth hacks that your VCs used in 2009 don’t work anymore. Even just seeing another founder's monthly investor updates is inspiring and helpful. 

If you’re a founder, FREE deals can offer a way to participate in companies that aren’t available as investments. Hot rounds get oversubscribed quickly. A small angel check isn’t meaningful to a founder who has already raised millions, but equity in your startup might still be interesting. As a founder, you have something to offer that is more valuable than cash. 

How To Use the FREE? 

The FREE is flexible: I expect founders to use it differently and customize it to their needs. 

Personally, I exchange 2–10 basis points of equity in 1:1 exchanges with founders at the same stage. That’s 0.02% to 0.1% per exchange. Why this range? Primarily, it’s small enough that it doesn’t dilute me much. Like all founders, I irrationally believe in myself and don’t want to give up much equity. At 5 basis points, for example, I can swap 40 times without giving up more than 2%. 

At the same time, 2–10 basis points are enough to be meaningful if I do find the next big thing. Startup returns follow an immense power law. In other words, the winners are so big that even small participation is a big deal. As I’m writing this, 0.02% of Stripe is worth $18M. 0.02% of Meta is worth $312M. 

I do FREE exchanges with high-quality founders that I organically encounter. This takes two forms for me: either founders from my network or founders of new products that I love. On the latter point, as founders, we’re often the earliest adopters of new tech. My last company was an early customer of Retool. I emailed their CEO and asked to invest, but their seed round was closed. If that happened now, I’d propose a FREE deal. 

I don’t go out of my way to source FREE opportunities. My focus is always on my startup. If a founder asked me to do a FREE deal and it was clear they spend a lot of time chasing equity swaps, I wouldn’t do it! Founders who aren’t laser-focused don't build generational companies. 

To that end, FREE deals are great for founders currently in accelerators. In accelerators, you naturally meet a bunch of founders at the same stage. You’re probably already subconsciously wasting a bunch of time trying to figure out who’s going to “make it.” Make your picks, do some FREE deals, and get back to building!

Feedback 

If you have questions about the FREE or ideas for improvements, I’d love to hear from you! I’m particularly interested in lawyer feedback. If your lawyer marks up the document, please send over the redline. You can get in touch here. 

- Tim L