Equity is ownership of the company. Vesting means you earn that ownership over time by staying and working, instead of getting all of it on day one. It protects the founders who stay from the ones who leave early.
The standard setup
- Four years in total. After four years, all of your shares are fully yours.
- A one-year cliff. If you leave before the first year, you keep nothing. On the one-year anniversary, 25% vests at once.
- Monthly after that. The remaining 75% vests in equal monthly parts over the next three years.
- Vesting usually starts when you began working full-time, not when the company was registered.
How it works legally
In most countries, founders receive all their shares at the start, and the company (or the other founders) gets the right to buy back unvested shares at a very low price if someone leaves. In some countries this is done with an option or a shareholders' agreement. A lawyer will choose the right structure for your company type.
Leaver terms
- Good leaver: leaves for an accepted reason (illness, family, mutual agreement). Keeps vested shares; unvested shares are bought back cheaply.
- Bad leaver: breaks the agreement, commits fraud or joins a competitor. May lose some or all shares, bought back at nominal value.
- Define both in writing, including the buy-back price and the deadline to use it.
Acceleration
Acceleration means unvested shares vest early, usually if the company is sold. 'Double trigger' is the common form: it needs both a sale and the founder losing their role. Investors are usually fine with double trigger and wary of single trigger.
Points to agree on
- When does vesting start for each founder?
- Is there a one-year cliff?
- What counts as a good and a bad leaver?
- At what price are shares bought back in each case?
- Is there acceleration if the company is sold?