Founder vesting deals with a simple risk. A founder may hold a large block of shares and then stop working on the business long before those shares have been earned, and vesting allows the company to take back the shares that were meant to reward work the founder did not do.
Investors usually ask about vesting, but I have also found that founders come to value it more than they expected, because it protects each founder against the others. What matters most is that the schedule is clear and that the company has a lawful way to recover the shares, since a vesting clause the company cannot enforce offers very little protection.
Agree what the schedule rewards
The schedule needs to state the number of shares and a start date. Founders should also discuss credit for earlier work openly, because if one founder spent a year building the product before the others joined, it is reasonable to backdate their start date or treat part of their shares as vested from the beginning.
The most common schedule runs for four years with a one‑year cliff. Nothing vests during the first year, a quarter of the shares vest at the twelve‑month mark, and the remainder vest monthly after that, so on 48,000 shares that means 12,000 at month twelve and 1,000 each month afterwards. The documents should also explain how rounding works and how part of a month is treated, so that both sides arrive at the same number.
Milestone vesting can work, but only where the milestone can be checked objectively, such as a product launch by an agreed date or a revenue figure shown in the audited accounts. The agreement should say who decides whether the milestone has been met and what happens if the company changes its strategy and the milestone no longer makes sense.
Ownership and voting before vesting is complete
Most of the startups I advise use reverse vesting. Under this arrangement the founder receives all the shares at the start, and the company has the right to buy back or require the transfer of the unvested portion if the founder leaves. Because the founder remains the registered shareholder throughout, the documents should say whether the founder can vote and receive dividends on the unvested shares while the restriction lasts.
The alternative is an option or a promise to issue shares in future. In that case the founder only becomes a shareholder when the option is exercised or the shares are issued, and the approvals are needed at that later stage. The tax treatment differs between the two structures for both the company and the founder, and founders who are US taxpayers holding restricted stock in a US company should know about the section 83(b) election, which must be filed within 30 days of the grant and can now be filed online with the IRS.
The full holding and the vested portion should be shown side by side in the cap table, so that each founder can check their position at any time.
Define the departure events
Good leaver and bad leaver terms decide what happens when a founder leaves. The agreement should cover death and incapacity, resignation, dismissal without cause and dismissal for serious misconduct, and where a departure can lead to a bad leaver label, it should describe the conduct that triggers it.
The price for vested and unvested shares should be set for each type of departure. Nominal value is the small capital figure attached to each share, so a founder whose shares are bought back at nominal value receives very little, while market value needs an agreed valuation date and method and a way to resolve disagreement, usually through an independent valuer.
The agreement should also say who decides how a departure is classified and whether the founder will receive notice and a chance to correct a breach, and it should include a rule for handling conflicts of interest. Severe price consequences can be challenged, so their enforceability should be checked before they are agreed, and I explain how this fits into the wider exit in working through a founder's departure.
A lawful way to recover the shares
Someone has to buy the unvested shares. If the buyer is the company, CAMA only allows it to buy its own shares through the statutory buyback procedure, which includes a shareholder resolution and solvency requirements. If another founder or a nominee buys them, the transfer is documented and stamped like any other share transfer.
The agreement should say when payment is made and which documents the departing founder must sign. Many agreements include a power of attorney so the company can complete the transfer if the founder refuses to sign, and it should be properly executed and limited to that purpose. Before the company relies on it, particularly where the founder disputes the classification or the price, it should take advice.
Ending the founder's employment and removing them as a director are separate steps from the share transfer, and each has its own process. Once all of them are complete, the registers should be updated and the CAC filings made.
A sale or new investment
Acceleration brings vesting forward when a defined event happens. Single‑trigger acceleration happens on a sale alone, while double‑trigger acceleration needs both a sale and a second event, usually the founder being dismissed or having their role significantly reduced within a set period afterwards. The sale and the qualifying termination should be defined carefully, including the situation where a buyer offers the founder a much smaller role.
If a buyer offers replacement shares or options, they should be compared with the existing schedule and rights before completion, and the founder's consent should be obtained where the terms require it.
Investors sometimes ask founders to put their shares back on a vesting schedule as part of a round. When that happens, founders should negotiate how many shares are affected and how much credit they receive for past work, and agree what happens if they are dismissed soon after the round, with the result written into the financing documents and the amended schedule.
Keep a calculation everyone can check
When a departure or a transaction makes the vesting position important, the company should give the founder a dated vesting statement showing the start date, the months that have passed and the effect of any amendment or acceleration. If the founder disagrees with the figure, both sides should go back to the signed documents.
Any change to the schedule needs the approvals the documents require, and those approvals should be filed with the updated calculation, because a future investor will want to see how each founder's holding reached its current position.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.