What Founder Vesting Is, and Why Every Round Requires It

The problem it solves

Two people incorporate, split the equity, and start building. Eight months later one of them takes a job elsewhere.

Without vesting, that person keeps their full stake. They contributed eight months and hold equity equal to the person who spends the next eight years on it. Nothing in the corporate documents makes them give it back, because they own it outright.

The consequences compound. The remaining founder now runs a company where a large block of stock belongs to someone who is not working on it, and every share issued to replace that person dilutes the people who stayed rather than the person who left. The absent holder may have consent rights over future actions and will need to sign documents at every financing.

Most importantly, the company is difficult to fund. An investor evaluating the business sees a substantial shareholder with no ongoing role, and the standard remedy, restructuring the stake, requires the cooperation of the person who has the least reason to cooperate.

Vesting prevents all of it by making ownership conditional on continued involvement. It is the single most consequential document decision founders make at formation, and it is routinely skipped because it feels like planning for a falling out with someone you just agreed to build a company with.

How it works mechanically

For founders the structure is usually reverse vesting, which differs from how employee equity works and is worth understanding precisely.

The founder receives and holds the shares at formation. The company holds a right to repurchase them, typically at the price paid, and that right lapses over the vesting period. So the founder owns the stock and votes it from the beginning, and the company's ability to take it back shrinks each month.

Employee equity generally works the opposite way: the employee holds an option that becomes exercisable over time, so they own nothing until they exercise.

The schedule. Four years with a one year cliff is the common convention. Nothing vests during the first year. At the one year mark a quarter vests at once, and the remainder vests in monthly increments over the following three years.

The cliff. This is the part most often misunderstood. A founder who leaves at eleven months has earned nothing, which is the intended behaviour rather than a harsh edge case. The cliff exists precisely to make a short tenure produce no lasting ownership.

Credit for prior work. Where founders worked together before incorporating, the schedule can be backdated so the vesting start date reflects when work actually began. This is a normal request and it is easier to agree at formation than later.

Re-vesting at a financing. Investors frequently require founders to restart or extend vesting as a condition of a round. If founders are already substantially vested, this is a real negotiation point and it should be anticipated rather than discovered in the term sheet.

Termination. The documents should distinguish leaving voluntarily, being removed without cause, and being removed for cause, since the treatment differs and the definition of cause is where the disagreement will happen.

Acceleration, and the terms worth negotiating

Acceleration determines what happens to unvested shares when the company is sold.

Single trigger accelerates vesting on the sale itself. Founders like it and acquirers dislike it, because the acquirer is often buying the team and single trigger means the people they wanted are fully vested on closing with no remaining incentive to stay.

Double trigger accelerates only if the company is sold and the founder is terminated within a defined period afterwards. This is the version most commonly agreed, because it protects a founder who is pushed out after an acquisition without removing the acquirer's retention.

Investors generally resist single trigger for the same reason acquirers do, and the practical outcome in most negotiations is double trigger with the definition of termination and the window being the points actually argued over.

Beyond acceleration, the terms worth attention at formation are the vesting commencement date, the definition of cause, whether the repurchase right applies at original price or fair value, and what happens if a founder reduces to part time rather than leaving outright. That last one is unaddressed in most standard documents and it is the situation that actually occurs.

One further point for founders receiving restricted stock in the United States: an election exists that changes how the stock is taxed, and it must be filed with the tax authority within a short fixed window after the grant. Missing that window cannot be corrected afterwards. The mechanics and whether it is advantageous depend on individual circumstances.

This page is general information rather than legal or tax advice. Vesting terms interact with corporate documents, employment arrangements, and tax treatment that vary by jurisdiction, and these are decisions to make with counsel before signing rather than after.