Founder vesting: why investors ask for it and how to make it fair
What vesting is, why it protects founders from each other as much as investors from founders, the standard schedule, what to negotiate, and the leaver provisions that decide whether it is fair or a trap.
Investors will ask the founders to put their shares on a vesting schedule: you keep earning them over three or four years, and if you leave early the unvested ones can be bought back cheaply. Founders bristle — "they're my shares" — and then, a year later, thank the investor when a co-founder walks out after eight months with nothing but vested equity. Vesting is for the people who stay.
How it works
Your shares are still yours — you vote them, you get dividends — but a reverse-vesting agreement says the company can buy back the unvested portion at nominal value if you leave. A typical schedule: four years, with a one-year cliff (nothing vests until month twelve, then 25% at once) and monthly thereafter. Leave at month 30 and you have vested 62.5%; the other 37.5% goes back.
Why it protects founders too
Two founders, 50/50, no vesting. One leaves after a year to take a job. The remaining founder now works for four more years building a business half of which belongs to someone who left. Investors will not fund that cap table, so the remaining founder cannot raise, and the company dies — or the remaining founder spends six months and a solicitor negotiating a buy-back from a position of no leverage. Vesting makes the buy-back automatic. That is why experienced founders ask for it before investors do.
What to negotiate
- Credit for time served. If you have worked on the business for two years before the round, ask for a proportion to be vested on day one — a third to a half is common.
- Acceleration on exit. If the company is sold, unvested shares vest (single trigger), or vest if you are also let go by the buyer (double trigger). Double trigger is market; single trigger is worth asking for.
- The schedule. Three years rather than four for a company that is already trading; monthly rather than annual vesting after the cliff.
- Buy-back price. Nominal for bad leavers; fair value for good leavers, payable over time if the company cannot afford it at once.
The leaver provisions, which decide everything
A good leaver keeps vested shares and may be paid fair value for unvested ones. A bad leaver can lose everything at nominal value. The definitions are what matter:
- Bad leaver should mean: fraud, gross misconduct, material breach of the shareholders' agreement, breaching restrictive covenants.
- Bad leaver should not mean: resigning, being dismissed without cause, ill health, death, or "leaving within X years" by itself.
- Good leaver should cover: death, ill health, redundancy, dismissal without cause, retirement at an agreed date, and a catch-all for anyone the board agrees to treat as good.
A draft that makes resignation a bad-leaver event turns vesting from a fairness mechanism into a trap. Push back, with a solicitor. It is the single most common overreach in seed documents and the single easiest to fix.
Questions founders ask
"We're two founders and no investor. Should we vest anyway?"
Yes. A founders' agreement with vesting and leaver terms, signed now, is the cheapest insurance against the most common way early companies fail.
"Does vesting affect SEIS/EIS?"
Not for investors; their shares are not subject to it. Founder shares are not in the schemes anyway.
"What happens to bought-back shares?"
They are usually cancelled or held in treasury, which increases everyone else's percentage — including the investors', which is why they like the mechanism.