Founder vesting: the four-year schedule and the one-year cliff

How founder vesting usually works

Founders often buy all their shares at the start and give the company a right to repurchase unvested shares if they stop providing services. The shares then vest over time. A common pattern is 25 percent after one year, the cliff, and the rest in equal monthly installments over the following 36 months. Investors often ask for this so that a founder who leaves early does not keep a large stake.

For tax purposes, stock that the company can take back if you stop working is generally subject to a substantial risk of forfeiture. Treasury regulations describe this as rights conditioned on the future performance of substantial services. That is why founder vesting and the 83(b) election usually go together.

Work through the leaver scenarios

Example: A founder holds 4,000,000 shares on a four-year schedule with a one-year cliff. If they leave after nine months, nothing has vested and the company can repurchase all the shares under the agreement. If they leave after 18 months, 1,000,000 shares vested at the cliff and about 83,333 more vested in each of the next six months, so roughly 1,500,000 are vested and the rest are subject to repurchase.

Check the repurchase price, the time the company has to exercise the right, and whether it is automatic. Decide whether vesting credit starts from the date of the agreement or from an earlier date when the founder began working. Agree who decides on behalf of the company when a founder who is also a director leaves, since that person may have a conflict.

Acceleration and later changes

Single-trigger acceleration vests some or all unvested shares on a sale of the company. Double-trigger acceleration requires both a sale and a second event, usually termination without cause or resignation for good reason within a set period. Buyers and investors often prefer double-trigger because single-trigger can leave a key person fully vested on day one after closing.

Changing vesting later, for example when investors ask founders to re-vest in a financing, can have tax consequences and may require a new 83(b) analysis. Under Delaware law, the board determines the consideration for stock it issues, so make sure board approvals and stock records match the agreement that was signed.

Your next steps

1. Write down the vesting start date, cliff, monthly rate and repurchase price.
2. Test resignation, termination, death or disability, and a sale against the agreement.
3. Decide on acceleration deliberately and check the tax effect of any later change.