How founder vesting works
Founders often buy their shares upfront, but the company keeps a contractual right to repurchase some shares if the founder leaves before those shares vest. A common schedule is four years with a one-year cliff, though founder arrangements can vary.
The idea is simple: if someone owns 40% of the company but leaves after three months, the remaining team should not spend the next decade building around a ghost shareholder with a board seat in spirit and a hoodie in storage.
Why investors care
Investors want the people with meaningful ownership to remain motivated and involved. Vesting also protects the company from dead equity, founder disputes, and awkward restructuring before a financing.
Legal details to get right
- Repurchase mechanics: The company needs a clear right to buy back unvested shares.
- Acceleration: Some arrangements accelerate vesting after a sale or termination without cause.
- 83(b) election: Founders typically need to file within 30 days after receiving restricted stock.
- Board approval: Vesting terms should be approved and reflected in company records.
- Tax review: Equity tax mistakes can be wildly disproportionate to the time saved by skipping review.
Setting up founder vesting?
Nebo Legal helps founders issue restricted stock, document vesting, file clean approvals, and prepare for investor diligence.
Book a callFAQ
Is founder vesting required?
Not always, but it is common for venture-backed startups and often expected by investors.
What happens if a founder leaves?
The company may be able to repurchase unvested shares under the stock purchase agreement.
Alex Ravski is the founder of Nebo Legal, P.C., a former Foley & Lardner attorney advising startups on formation, financing, and cross-border deals.