Vesting and Cliff in Founders Agreements

What vesting actually does

Without vesting, a founder who receives shares at incorporation owns them immediately and forever. If that founder leaves the company after a month, they walk away with their full equity stake — even though they contributed very little. The remaining founders are left working to build value for someone who is no longer involved.

Vesting solves this by making equity conditional on continued involvement. Shares are granted up front but earned over time. A founder who leaves early keeps only the portion that has vested; the unvested portion returns to the company. This keeps the equity aligned with the people who are actually building the business.

The cliff: why the first year is different

A cliff is a period at the start of the vesting schedule during which no equity vests. The most common cliff is one year. If a founder leaves before the cliff expires, they vest nothing. On the day the cliff is reached, a single block vests (typically 25% under a four-year schedule), and the remainder vests gradually thereafter.

The cliff protects the company during the highest-risk period — the early months, when it is not yet clear whether the founder-founder relationship will work. It prevents a short-lived collaboration from permanently diluting the company.

Common vesting schedules

The most common schedule in startups is four years with a one-year cliff, vesting monthly or quarterly thereafter. This has become a market standard that investors expect. Other schedules exist — three-year, five-year, or with different cliff lengths — but any deviation should be deliberate.

• Four years with a one-year cliff — the market standard.
• Monthly vesting after the cliff — smoother and more common.
• Quarterly vesting after the cliff — simpler administratively.
• Custom schedules for specific roles or contributions.

The schedule should be the same for all founders unless there is a clear reason for a difference, since unequal schedules can create resentment and disputes.

Good leaver vs bad leaver

Vesting interacts with the departure terms in the founders agreement. A good leaver — someone who leaves for acceptable reasons such as death, disability, or a mutual decision — typically retains their vested shares. A bad leaver — someone who leaves in breach of the agreement — may be required to sell even their vested shares back to the company, often at a discount.

The definitions of good and bad leaver should be explicit. Vague terms create disputes at exactly the moment the company is most vulnerable. For a full treatment, see the Founder Disputes service.

Acceleration: single and double trigger

Acceleration clauses cause unvested shares to vest early upon certain events. Single-trigger acceleration vests all remaining shares on a single event — typically a sale of the company. Double-trigger acceleration requires two events — commonly a sale followed by termination of the founder within a defined period.

Investors often resist broad acceleration, because it can complicate or block a sale by inflating the equity that must be paid out. Double-trigger is more common in funded companies because it protects the founder without deterring acquirers.

What happens to unvested shares

When a founder leaves, the unvested portion of their shares typically returns to the company's equity pool, to be used for future grants. The exact mechanism — repurchase at nominal cost, cancellation, or transfer to a pool — should be defined in the founders agreement.

The vested portion is treated according to the good leaver / bad leaver rules. The cleanest arrangements make the outcome predictable: the founder, the company and future investors all know exactly what happens on any given departure.

What to check before agreeing

Before signing a vesting schedule, the founder should understand the total length, the cliff, the vesting frequency, the acceleration terms, and the leaver definitions. Each of these affects what the founder actually keeps if circumstances change.

• Total vesting period and cliff length.
• Vesting frequency (monthly is smoother than annual).
• Acceleration triggers and scope.
• Good leaver and bad leaver definitions and consequences.
• Treatment of unvested shares on departure.
• What happens on a sale, termination, or change of role.

Vesting is one of the most important terms in a founders agreement. Reviewing it before signing — and understanding its real effect — is essential.