What it means
Two founders agree to build a company together, and if one leaves after a few months, the other may not want that person to keep an unrestricted share of the business forever. A vesting arrangement defines what happens to the early leaver's unvested equity.
Shares, options and other equity interests may vest differently, so do not assume every founder owns shares only after they "earn" them. Equity issuance, repurchase rights, departure definitions and acceleration terms must work together, so read the agreement as a whole.
A founder may receive credit for work done before formal incorporation if the parties agree and the law permits. Four years is a familiar US startup example, not a mandatory global schedule, and a business can negotiate a different timeline.
A one-year cliff usually means no scheduled portion vests before the first anniversary, with an initial instalment vesting then. After the cliff, shares may vest monthly, quarterly or on milestones, and a straight-line formula may not match the document.
If vesting depends on a deliverable, define objective acceptance and who confirms it, and record each founder's allocation, since vesting does not by itself decide the initial split or future dilution. Resignation, dismissal, incapacity and death can be treated differently under the documents and law.
A company repurchase right may need notice, payment or board approval and is not necessarily an automatic transfer, and a buyback of unvested shares may occur at a stated price or under a formula, subject to the relevant rules. A vested share may still face rights of first refusal, lockups or other sale restrictions, and an acquisition or qualifying termination may change the normal schedule if the agreement provides for acceleration.
New investors may ask founders to adopt or amend vesting, so negotiate the effect on work already contributed. A cap table should show issued equity, vesting schedule, vested amount and restrictions accurately, and voting rights for issued-but-unvested stock may exist before the restriction lapses, depending on the arrangement.
Tax elections and filing deadlines differ by jurisdiction, so seek local legal and tax advice, since a US Section 83(b) discussion is not a global requirement. Avoid verbal promises, because an informal understanding about "earning shares" may not match corporate documents or investor expectations, and founder services and employment obligations can create separate rights and duties that vesting terms do not replace under labour law.
Plan a neutral process for disagreements about leaving or performance, and talk early, since founders have more room to agree fair terms before a departure or major financing makes positions entrenched. Carta describes US-style founder shares often issued early with vesting and potential repurchase, and Cooley GO likewise describes an optional schedule and a common cliff, but these are examples of practice, not universal legal outcomes, and vesting can limit a free-rider problem without fixing poor governance or unclear responsibilities.
In practice
Real-world examples.
Example
A founder leaves before a contractual cliff and the agreement defines the treatment of unvested shares.
Example
Two founders negotiate credit for work completed before incorporation.
Example
A sale triggers accelerated vesting only because the signed documents provide for it.
Formula
Calculation
Illustrative straight-line vested amount after a cliff = total scheduled shares x completed vesting periods / all scheduled periods, subject to the agreement. For 400,000 shares over 48 monthly periods, 24 completed periods would imply 200,000 vested if no other terms apply. Confirm cliff, rounding and acceleration.
Worked cliff example: the same 400,000 shares vest over 48 months with a 12-month cliff. At month 11 nothing has vested. At month 12 the cliff is met and 400,000 x 12 / 48 = 100,000 shares vest. If the founder leaves at month 18, 400,000 x 18 / 48 = 150,000 shares have vested, leaving 400,000 - 150,000 = 250,000 unvested shares that the agreement may allow the company to repurchase.Case study
Seen in the real world.
Fictional case: Harbor Labs issued shares to two founders with a four-year vesting restriction and a documented company repurchase right. One founder left after eighteen months. Counsel reviewed the actual agreement, notices and local tax treatment before the company updated its cap table.
The fictional example deliberately does not assert automatic cancellation of shares. Before its next funding round, the fictional company also asked its remaining founder to confirm in writing which work counted towards vesting and who would sign off any milestone. Investors reading the cap table could then see the vested and unvested amounts and the agreed repurchase terms in one place, which reduced questions during due diligence.
Watch out
Common mistakes.
- Assuming a four-year schedule with a one-year cliff is legally mandatory.
- Treating unvested issued shares as if they never existed without reading repurchase terms.
- Ignoring local tax, securities and departure rules when copying a foreign template.
Questions
People also ask.
Are founder shares always vested over four years?
No. That is a common example in some startups; the agreement sets the schedule.
What happens if a founder leaves?
Check the signed terms and local law for vested rights and any repurchase of unvested interests.
Does vesting prevent dilution?
No. New equity issuance can dilute a founder independently of vesting.
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