A vesting schedule sets out how a founder earns their shares over time, so that a founder who leaves early doesn’t walk away with all of them. Shares that have vested are the founder’s to keep. Shares that haven’t vested yet can be taken back by the company or the other shareholders if the founder leaves, usually for a nominal sum.
Founder vesting protects the founders who stay from the one who leaves. Without it, a co-founder who walks out in year one can keep a third of the company while the others do the work that makes those shares valuable. Investors ask for it for the same reason, because they’re backing the team that’s running the business.
I’ve raised £250m+ for my own companies and funded more than 750 businesses with over £1bn, so I’ve seen these terms as a founder, as an investor and as a lender.
What Vesting Is
Vesting ties ownership of shares to time spent working in the business. Share vesting is used in two different ways, and they’re easy to confuse:
- Founder vesting. The founder already owns the shares. The vesting schedule decides how many of them the founder can be made to give back on leaving.
- Employee share options. The employee owns nothing yet. Their options vest over time and give them the right to buy shares later at a set price.
Whether shares can be taken back from a departing founder isn’t decided by a conversation between the founders. It comes down to whether the articles of association and the shareholders’ agreement contain leaver provisions. If they don’t, a founder who leaves keeps every share they hold.
Standard Schedules and Cliffs
A common schedule is 4 years with a 1-year cliff. The cliff is a period at the start during which nothing vests at all. If the founder leaves before the first anniversary, they can lose every share that’s subject to vesting. On the first anniversary, a quarter of the shares vest at once. After that, the rest vest in equal monthly amounts over the remaining 3 years.
Say a founder holds 480,000 shares on a 4-year schedule with a 1-year cliff:
| Founder leaves after | Vested shares | Unvested shares |
|---|---|---|
| 9 months | 0 | 480,000 |
| 12 months | 120,000 | 360,000 |
| 30 months | 300,000 | 180,000 |
| 48 months | 480,000 | 0 |
After the cliff, 10,000 shares vest each month, which is 360,000 shares over 36 months.
The schedule doesn’t have to start on the day the founder signs. Founders who have already worked in the business can agree a start date that gives credit for that time, or have part of their holding treated as vested from day one. Some schedules vest quarterly instead of monthly.
Reverse Vesting in UK Companies
In a UK company the founders usually own all their shares outright from the day the company is set up. Vesting therefore works in reverse. The founder holds every share from the start, with full voting and dividend rights, and the leaver provisions give the company or the other shareholders the right to take back the unvested ones if the founder leaves.
That’s known as reverse vesting, and it’s written into the articles of association and the shareholders’ agreement. The leaver provisions usually set out:
- what counts as leaving, normally ceasing to be a director, employee or consultant of the company
- how many shares are unvested on the date the founder leaves
- who can take the shares, such as the company, the other shareholders or an employee benefit trust
- the price paid for them, which is where good and bad leaver terms come in
- whether the shares are bought back or converted into deferred shares, which carry no votes and no real economic value
Converting unvested shares into deferred shares means the company doesn’t need the cash or reserves to buy them back, as long as the articles allow it.
When a company brings in an investor, the leaver terms are often negotiated alongside the term sheet, and the investor’s lawyers draft them into new articles. The new articles also replace the existing transfer and pre-emption rights, so the leaver provisions and the rules on who gets offered shares sit in the same document.
Good Leaver vs Bad Leaver
Good leaver bad leaver provisions decide the price a departing founder gets for their shares, based on why they left.
A bad leaver is usually someone who leaves in circumstances within their control that harm the company. Things like:
- dismissal for gross misconduct or fraud
- a serious criminal conviction
- a material breach of a non-compete or other restrictive covenant
- resignation within an agreed period, if the founders and investors have agreed that resignation counts
A good leaver is either anyone who isn’t a bad leaver, or someone who leaves for a reason on a set list, such as death, serious ill health, redundancy or dismissal without cause. Which way the definition is written makes a big difference. If good leaver is the default, a founder only loses out by doing something on the bad leaver list.
The model documents for early stage investments published by UK Private Capital, formerly the BVCA, are a common starting point for UK venture deals. In their current form, a good leaver keeps their vested shares and loses the unvested ones, and a bad leaver loses everything. The February 2025 update removed resignation from the default bad leaver definition, so an investor who wants resignation treated as a bad leaver event has to say so in the term sheet.
| Good leaver | Bad leaver | |
|---|---|---|
| Vested shares | Kept, sometimes without voting rights, or bought at fair value | Lost, bought at nominal value or the lower of cost and fair value, or converted into deferred shares |
| Unvested shares | Bought at nominal value or the lower of cost and fair value, or converted into deferred shares | Bought at nominal value or the lower of cost and fair value, or converted into deferred shares |
Using the founder from the table above, a good leaver who goes after 30 months keeps 300,000 shares and gives up 180,000. A bad leaver at the same date can lose all 480,000.
Fair value is set by the articles. It’s usually what the board agrees with the leaver, or a figure from an independent valuer if they can’t agree.
Acceleration on Exit
Acceleration means some or all of a founder’s unvested shares vest early when a particular event happens, usually a sale of the company. There are two common versions:
- Single trigger. The unvested shares vest when the company is sold, whether or not the founder stays on afterwards.
- Double trigger. The unvested shares only vest if the company is sold and the founder’s role then ends without cause, within an agreed period after the sale.
A buyer usually wants the founders to stay and run the business after a sale, and unvested shares give them a reason to. That’s why investors and buyers tend to resist full single trigger acceleration, and why double trigger, or acceleration of only part of the unvested shares, is the more usual compromise.
Tax on Vesting Shares
Founders who are also directors or employees usually hold their shares as employment-related securities for UK tax. Shares that can be taken back at less than market value are restricted securities, and without an election income tax can be charged later, when the restrictions lift and the shares are worth more.
A section 431 election avoids that. The founder and the company sign a joint election to be taxed on the shares’ unrestricted market value at the date of acquisition, ignoring the leaver restrictions, and later increases in value fall under capital gains tax instead.
HMRC’s guidance says the election has to be made within 14 days of acquisition and in an approved form. For founders who set the company up and paid nominal value for their shares, the market value at that point is usually close to what they paid, so the election often creates little or no tax at all.
Advisers often recommend a protective election when leaver terms are added to shares founders already hold, such as when an investor comes in.
Companies in Australia, Singapore and the UAE use the same mechanism, through the constitution or articles and a shareholders’ agreement, and the tax treatment depends on each country’s own rules.
In the US, founder shares are usually issued as restricted stock with a right for the company to buy back unvested shares. The founder can file a section 83(b) election to be taxed on the value of the shares when they’re issued, rather than as they vest. The IRS says it must be filed no later than 30 days after the shares are transferred.
Setting It Up
- Agree the terms. The length of the schedule, the cliff, any credit for time already worked, the good and bad leaver definitions, the leaver prices and any acceleration.
- Write them into the documents. The leaver provisions go in the articles of association, and the shareholders’ agreement sets out the founders’ obligations, such as the restrictive covenants that feed into the bad leaver definition.
- Adopt the new articles. Changing the articles needs a special resolution, passed by at least 75% of the votes cast, and a copy goes to Companies House within 15 days.
- Sign the tax elections. A section 431 election for UK founders within 14 days, or an 83(b) election in the US within 30 days.
- Record it. The cap table shows each founder’s holding and how much of it is vested, so it’s clear at any date what a leaver would keep.
Founders who put vesting in place between themselves set the terms themselves. When vesting first appears in an investor’s term sheet, the investor’s draft is the starting point for the negotiation.
FAQs
What is a typical founder vesting schedule?
A common founder vesting schedule is 4 years with a 1-year cliff, with a quarter of the shares vesting on the first anniversary and the rest monthly over the following 3 years. Founders can agree a different length, a credit for time already worked or vesting on only part of their holding.
Can vesting be added after the company is set up?
Yes, founder vesting can be added at any time by changing the articles of association and the shareholders’ agreement. It’s often added when an investor comes in, and the founders sign a section 431 election at the same time.
What happens to vested shares when a founder leaves?
A good leaver usually keeps their vested shares or sells them at fair value, while a bad leaver can lose them. Which one a founder is depends on the definitions in the articles. A bad leaver’s shares are bought at nominal value or the lower of cost and fair value, or converted into deferred shares.
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This explains how founder vesting generally works. It isn’t legal or tax advice, and a solicitor and accountant should check the terms and the tax position before shares are issued or articles are changed.
