Founder Vesting
Quick Facts
- Standard: 4-year vesting with 1-year cliff
- When required: Almost always by institutional investors
- Variation: Credit for time already worked
- Key protection: Acceleration provisions
Founder vesting subjects founders' equity to a vesting schedule, just like employee equity. If a founder leaves early, they forfeit unvested shares. While it may feel punitive, founder vesting protects co-founders, investors, and the company from the "dead equity" problem.
In Plain English
Founder vesting means you don't truly "own" all your shares until you've earned them over time. It's insurance against a co-founder quitting at month three with half the company. Yes, you're a founder—but investors want to see you committed for the long haul.
Why Founder Vesting Matters
The Co-Founder Nightmare
Imagine this scenario without vesting:
- You and a co-founder each own 50%
- Co-founder leaves after 4 months
- They still own 50% of the company
- You do all the work; they get half the upside
- Investors won't touch you with a 10-foot pole
Vesting prevents this disaster.
Investor Requirements
Virtually all institutional investors require founder vesting:
- Shows founders have "skin in the game"
- Ensures founders stay motivated
- Protects the cap table from dead equity
- Aligns long-term incentives
Standard Founder Vesting Terms
| Element | Typical Term |
|---|---|
| Total period | 4 years |
| Cliff | 1 year (sometimes waived) |
| Post-cliff vesting | Monthly (1/48th) |
| Acceleration | Double-trigger |
Credit for Time Served
If founders have been working for 18 months before raising money, investors may give "credit":
Example:
- 4-year vesting schedule
- 18 months credit for prior work
- 25% already vested at closing
- Remaining 75% vests over remaining 2.5 years
This recognizes founders' prior contributions while still maintaining ongoing commitment.
Single-Founder Vesting
Even single founders should consider vesting:
- Shows investors maturity and commitment
- Creates structure for future co-founder additions
- Protects company if founder must be removed (rare but possible)
- Prevents regret if founder sells shares too early
Reverse Vesting
Most founder vesting is reverse vesting:
- Founder receives all shares at formation
- Company has right to repurchase unvested shares
- Repurchase right lapses over the vesting period
- If founder leaves, company buys back unvested shares at cost
This achieves the same economic outcome as forward vesting while allowing founders to file an 83(b) election immediately.
Acceleration Provisions
Single-Trigger Acceleration
All shares vest upon a change of control (acquisition):
- Pro: Founders are fully rewarded at exit
- Con: Removes incentive to stay post-acquisition
- Status: Rare; investors typically oppose
Double-Trigger Acceleration
Shares vest only if BOTH occur:
- Change of control (acquisition)
- Termination without cause (or resignation for "good reason")
- Pro: Balances founder protection with continued incentive
- Con: More complex to negotiate
- Status: Industry standard
Partial Acceleration
Common compromise structures:
- 12-month acceleration: Vest an additional year upon trigger
- 50% acceleration: Half of unvested shares accelerate
- 100% double-trigger: Full acceleration only with both triggers
What Happens If a Founder Leaves
| Scenario | Vested Shares | Unvested Shares |
|---|---|---|
| Voluntary departure | Keeps them | Forfeited/repurchased |
| Terminated for cause | Keeps them | Forfeited/repurchased |
| Terminated without cause | Keeps them | May accelerate (if negotiated) |
| Acquisition (stays) | Keeps them | Continue vesting or accelerate |
| Acquisition (terminated) | Keeps them | Typically accelerate (double-trigger) |
Negotiating Founder Vesting
Founders Should Seek:
- Credit for prior work: If company isn't brand new
- Shorter cliff: 6 months instead of 12
- Double-trigger acceleration: Protection in acquisitions
- "Good reason" definition: Clear triggers for voluntary departure
- Spousal consent: Ensure spouse can't block stock transfers
What Investors Require:
- Standard vesting schedule: 4 years is non-negotiable for most
- All founders vest: Not just new additions
- Same terms: Equal treatment among co-founders
- Board discretion: Ability to waive repurchase in special cases
The 83(b) Election (Critical)
When founders receive restricted stock subject to vesting, they should file an 83(b) election within 30 days:
- Without 83(b): Pay ordinary income tax as shares vest (potentially at much higher values)
- With 83(b): Pay tax immediately on current (low) value; future gains are capital gains
Missing this deadline can cost millions. Work with a tax advisor.
Practical Takeaways
For founders: Accept that vesting is standard and healthy—it protects you from a co-founder disaster as much as it protects investors. Negotiate for time credit and double-trigger acceleration, and never miss the 83(b) election deadline.
For investors: Require vesting for all founders, even those who've been working for years. Be reasonable about time credit, but ensure there's meaningful future vesting. Double-trigger acceleration is the appropriate standard.
Related Reading
- Vesting Schedule — The mechanics of how vesting works
- Cap Table — Where founder equity is tracked
- Drag-Along Rights — Other provisions affecting founder exits