Quick facts
- Common structure: four years, one-year cliff, monthly after that
- Usual mechanism: reverse vesting on shares you already hold
- Negotiable: credit for time already worked, cliff length, acceleration
- Tax deadline: 30 days to file an 83(b) election
Founder vesting puts founders' own shares on a vesting schedule. Leave early and you keep only what has vested. It feels different from employee vesting because you were there first, and it is the same idea.
In plain English
Vesting is usually described as protecting investors. That is true and it is not the main point. Founder vesting mostly protects you from your co-founder, and your co-founder from you.
The problem it solves
Two founders, 50% each, no vesting. One leaves after four months. They still own half the company. You do the next six years of work and they own half of that too, without answering an email.
There is no clean fix after the fact. You can ask them to give shares back, and they can decline. The next investor who looks at your cap table sees half the equity held by someone who is gone, which is the sort of thing that ends a process rather than starting a negotiation.
Vesting is the fix, and it only works if you install it before you need it.
Standard terms
| Element | Typical |
|---|---|
| Total period | 4 years |
| Cliff | 1 year, sometimes waived for existing founders |
| After the cliff | Monthly, 1/48th |
| Acceleration | Double trigger |
Credit for time served
If you have been working on the company for a while before raising, ask for credit for that time. Investors frequently grant it.
On a four-year schedule with 18 months of credit, 18 of the 48 months are already behind you. That is 37.5% vested at closing, with the remaining 62.5% vesting over the next 30 months.
Do this arithmetic yourself rather than accepting a characterisation of it. "You will be about a quarter vested" and "you will be 37.5% vested" are the same sentence delivered with different amounts of care.
Reverse vesting, which is what you will actually sign
Founders hold their stock from incorporation, so there is nothing to vest into. The mechanism runs backwards instead:
- You already hold all your shares.
- The company has the right to repurchase the unvested portion at what you paid.
- That repurchase right lapses over the vesting schedule.
- If you leave early, the company buys back whatever has not vested.
Delaware law gives a corporation the power to purchase and hold its own shares,4 which is what makes this structure work. The economics match forward vesting exactly. The legal form is inverted, and the inversion is what lets you file an 83(b) election on day one.
Acceleration
Single trigger vests everything on a change of control. Founders like it, acquirers dislike it, because it removes the reason to stay after the deal. It is uncommon.
Double trigger requires both a change of control and being terminated without cause, or resigning for good reason. This is the standard, and it is the right ask. It protects you if an acquirer eliminates your role without paying you for a role you keep.
Partial versions exist: twelve extra months of vesting on trigger, or half the unvested shares.
Negotiate the definition of "good reason" as carefully as the percentage. If it does not include a material reduction in your role, then a demotion to a title with no reports is not a trigger, and staying miserable becomes the only way to keep vesting.
What happens when a founder leaves
| Situation | Vested | Unvested |
|---|---|---|
| Resigns | Kept | Repurchased or forfeited |
| Terminated for cause | Kept | Repurchased or forfeited |
| Terminated without cause | Kept | May accelerate, if negotiated |
| Acquisition, stays on | Kept | Continues vesting or accelerates |
| Acquisition, terminated | Kept | Typically accelerates under double trigger |
The 83(b) election
Because reverse-vested stock is subject to a repurchase right, it is property transferred subject to a substantial risk of forfeiture. Without an election you are taxed as the shares vest, at whatever the company is worth then. With an 83(b) election you are taxed now, on today's value, which at formation is close to nothing, and future appreciation is capital gain.
The election must be made no later than 30 days after the date of transfer.1 The Internal Revenue Service states the same 30-day requirement in Revenue Procedure 2012-29,2 and publishes Form 15620 for making it.3
Thirty days from the transfer. Not from incorporation, not from the financing, and not from when your lawyer gets back to you.
What to negotiate
Credit for time already worked. A shorter cliff, or none, given you have already been doing the job. Double trigger acceleration with a real definition of good reason. Equal terms across co-founders, because unequal vesting is a fight deferred rather than avoided. And spousal consent where relevant, so a share transfer cannot be blocked later.
What to do next
If your company has no founder vesting, put it in now, while you and your co-founder still agree about everything. It is a twenty-minute conversation today and an unresolvable one in eighteen months.
If you have just been issued reverse-vested stock, calculate the 30-day deadline and file. Then read the mechanics of vesting schedules and the mistakes that compound at seed.
Related reading
- Vesting Schedule covers the mechanics and the option exercise window
- Cap Table covers where vested and unvested founder shares are recorded
- Drag-Along Rights covers what can force your shares into a sale regardless