Founder vesting means a founder earns their shares over a period of time instead of owning all of them outright from day one. If they leave before the shares have vested, the company can take back the unvested ones, usually by buying them at nominal value or converting them into worthless deferred shares. Good leaver and bad leaver clauses decide what happens to the shares that have vested, based on why the founder left.
Investors ask for both when they put money in, because they’re backing the team as much as the idea. A founder who walks out a year after the round with a third of the company leaves the rest of the team building value for a shareholder who’s stopped contributing.
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How Founder Vesting Works in the UK
In a UK company, founders usually already own their shares before the investor arrives. So vesting is normally done in reverse: the founder keeps all their shares, but agrees that a falling proportion of them will be lost if they leave. Investors often ask founders to “vest” or “reverse vest” part of their equity when the investment is first made, with unvested shares bought back or converted into worthless deferred shares if the founder leaves too early.
The rules sit in the company’s articles of association and the shareholders’ agreement, and the headline terms are agreed first in the term sheet.
The standard shape in UK venture deals is:
- Vesting period: 4 years. The UK Private Capital (formerly BVCA) model documents use a 48-month period, though it’s generally negotiated, including to take account of vesting agreed in earlier rounds.
- Cliff: 1 year, optional. If the founder leaves in the first 12 months, nothing has vested, even if they’re a good leaver.
- Monthly vesting after the cliff. After the cliff, a slice vests each month until the end of the period.
- Acceleration. Vesting is often sped up, in whole or in part, on an exit or if the founder is dismissed without cause.
A Worked Vesting Schedule
Take a founder with 4,000,000 shares, all of them subject to 4-year monthly vesting with a 1-year cliff.
Shares vesting each month after the cliff = 4,000,000 ÷ 48 = about 83,333 shares
| Founder leaves at | Vested shares | Unvested shares | % vested |
|---|---|---|---|
| Month 10 (before the cliff) | 0 | 4,000,000 | 0% |
| Month 12 (the cliff) | 1,000,000 | 3,000,000 | 25% |
| Month 30 | 2,500,000 | 1,500,000 | 62.5% |
| Month 48 | 4,000,000 | 0 | 100% |
At month 30, the founder has served 30 of 48 months, so 62.5% of their shares have vested. The other 37.5% are the ones at stake if they leave.
Good Leaver vs Bad Leaver
Vesting answers how many shares a founder has earned. Leaver clauses answer what they get for them when they go, and that depends on why they left.
- Bad leaver. Someone who leaves because they did something wrong, such as gross misconduct, a serious criminal offence or breaking their non-compete (the promise not to set up or join a competitor for a set time after leaving).
- Good leaver. Under the model documents, any departure that isn’t “bad”. That covers death, ill health and being removed without proper cause. Since the February 2025 edition dropped the optional resignation limb, it also covers a founder who simply resigns, unless the investor negotiates otherwise, which is usually flagged in the term sheet.
What a good leaver gets for their vested shares depends on the documents, which take one of two approaches. Either the good leaver keeps their vested shares, or they have to sell them back at fair market value. Under the UK Private Capital model articles, a good leaver loses their unvested shares and keeps their vested ones, while a bad leaver loses all of their shares, vested and unvested, which convert into worthless deferred shares.
What That Means in Money
Here’s the same founder leaving at month 30, with the shares worth £1.00 each and a nominal value of 0.1p. Nominal value is the face value given to each share when it’s issued, usually a fraction of a penny for founder shares.
| Outcome at month 30 | Vested 2,500,000 shares | Unvested 1,500,000 shares | What the founder ends up with |
|---|---|---|---|
| Good leaver, keeps vested shares | Kept | Lost | £2.5m in shares, on paper only until there’s a sale |
| Good leaver, must sell vested shares at fair value | Bought back at fair value | Lost | £2.5m in cash, if the price really is £1.00 |
| Bad leaver | Lost | Lost | £4,000 at nominal value, or nothing as deferred shares |
If the unvested shares are bought back at nominal value instead of converted, the good leaver also gets £1,500 for them. Had the founder stayed to month 48, all 4,000,000 shares would have vested, worth £4m on the same price.
At month 30, a good leaver ends up with £2.5m in shares or cash, and a bad leaver with £4,000 at most. That’s why the definition of “bad leaver” is the line in the documents worth the most attention.
Some documents give a bad leaver the lower of market value and the issue price for their shares, which Practical Law gives as one approach, with nominal value as a less common one. For a founder, the issue price and nominal value are often the same, because most founders were issued their shares at nominal value when they set up the company. The wording sounds softer, but the result often isn’t.
Is Resignation a Bad Leaver Event?
Not in the current model documents, but investors still ask for it.
The February 2023 UK Private Capital model articles had an optional limb that made resigning a bad leaver event. The February 2025 edition removed it. The working group said resignation is rarely treated as a bad leaver event in practice, and where an investor insists on it, it’s usually called out in the term sheet.
Bird & Bird still sees investors push for resignation during the vesting period to count as bad leaving, with the argument stronger at the early stage than in later rounds.
So if a term sheet makes resignation a bad leaver event, that’s a deliberate ask, not boilerplate. A founder who resigns for burnout or a family crisis would lose almost everything, including shares they spent years vesting, unless the documents carve those situations out.
What Founders Should Negotiate
Investors have a fair point: they need the people they backed to stay. A founder’s fair point is that years of work shouldn’t vanish over a single disagreement. These are the terms where that balance gets set.
- Credit for time already served. A founder who has built the business for 3 years before the round can ask for part of their shares to count as already vested, with the 4-year schedule applying to the rest. Expect the investor to want bad leaver terms to apply to those pre-vested shares too; Bird & Bird advises investors to make sure they do.
- Vest only part of the shareholding. Investors often ask founders to vest part of their equity rather than all of it. The proportion is negotiable.
- Monthly vesting, not annual. After the cliff, monthly vesting means leaving at month 30 counts 30 months, not 24.
- A short bad leaver list. Keep the model-document default, where anyone who isn’t a bad leaver is a good leaver, so the list you’re negotiating is the short one. Limit it to things within the founder’s control that genuinely harm the company: gross misconduct, fraud, a serious criminal offence, a material breach of the non-compete and similar promises. Resist resignation, or limit it to a fixed early period.
- Removal without proper cause counts as good leaving. If the board removes a founder without proper cause, they should be a good leaver straight away, without having to prove unfair treatment first.
- Acceleration on a sale. Ask for unvested shares to vest when the company is sold, or at least if the buyer removes the founder within a set period afterwards.
- Who decides. Many term sheets let the board classify a leaver, “acting reasonably”. Board discretion can lead to conflict if decisions are seen as unfair, so clear definitions protect both sides.
- How fair value is set. For good leavers, agree who sets the price, such as an independent valuer, and when, before anyone needs it.
What’s fair, in my view: a 4-year schedule with credit for the time you’ve already put in, monthly vesting after the cliff, a bad leaver list limited to real wrongdoing, resigning after the cliff treated as good leaving, and fair value set by someone independent. If an investor wants more than that, they should explain why in the term sheet, not slip it into the articles.
Vesting also shows up in due diligence. A co-founder who has left with no leaver terms is one of the issues that holds up a round, as covered in cap table mistakes that stall due diligence.
Are Bad Leaver Clauses Enforceable?
Often, yes, but it depends on the drafting and the facts. Under English law, a clause that only exists to punish someone for breaking a contract can be struck down as a penalty.
In Cavendish Square Holding BV v Makdessi [2015] UKSC 67, a seller broke his non-compete, and a clause allowed the buyer to require him to sell his remaining shares at a price that left out goodwill. The Supreme Court held it wasn’t a penalty. The majority treated it as a primary obligation outside the penalty rule altogether, and in any case it protected the buyer’s legitimate interest in the goodwill rather than simply punishing him.
Makdessi was a share sale between commercially advised parties, not a founder leaver clause, so it’s a guide, not a guarantee. A founder shouldn’t sign on the assumption that a harsh bad leaver clause won’t hold up.
The Tax Step Founders Miss: Section 431
Shares held by a director or employee are “restricted securities” for UK tax if they can be forfeited or taken back for less than they’re worth, under section 423 of the Income Tax (Earnings and Pensions) Act 2003. Without an election, a tax charge can arise later, when the restrictions lift, based on what the shares are worth then.
A section 431 election lets the founder and the company agree to be taxed on the shares’ unrestricted market value at acquisition, removing that later charge. HMRC’s manual says the election must be made jointly by the employer and the employee, in a form HMRC approves, and not more than 14 days after the acquisition or chargeable event.
If a founder’s shares are subject to vesting from the day they’re issued, the 14 days run from issue. If vesting is being added to shares a founder already holds as part of a round, different rules can apply, so ask the company’s tax adviser promptly which election, if any, is needed. The deadlines are short and easy to miss in the rush to complete.
FAQs
What is founder vesting?
Founder vesting means a founder earns their shares over a set period, usually 4 years. If they leave before the shares vest, the company can buy back the unvested shares, usually at nominal value, or convert them into deferred shares with no value.
What is a typical vesting schedule for founders?
4 years, with an optional 1-year cliff and monthly vesting after that. It’s the standard in the UK Private Capital model documents, but the period is generally negotiated, including to take account of vesting agreed in earlier rounds.
What is the difference between a good leaver and a bad leaver?
A bad leaver leaves after misconduct or a serious breach and usually loses all their shares, vested and unvested. Under the model documents, anyone who isn’t a bad leaver is a good leaver, and usually keeps or is paid fair value for their vested shares.
Can a founder lose vested shares?
Yes, if the articles say so. In the UK Private Capital model articles, a bad leaver loses all their shares, including vested ones, while a good leaver keeps their vested shares.
Do UK founders need a section 431 election?
Often, if they hold shares as a director or employee that can be forfeited when they leave. It has to be signed jointly by the founder and the company within 14 days of acquiring the shares. If vesting is being added to shares you already hold, ask a tax adviser promptly which election, if any, applies.
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If you’re raising and want the round run properly, from getting investable to getting term sheets on the table, that’s what Capital Raiser does. For how each round changes everyone’s percentage, read equity dilution.
This is general information on how founder vesting and leaver clauses work and isn’t legal or tax advice.
