Founder Vesting: What Happens to Your Equity When You Raise

You've been working on your startup for two years. You own 40% of the company. Then you raise money and your investor says, "Great, now let's put you on a four-year vesting schedule."

Wait, what? You already earned that equity. Why would you vest it again?

This is called founder vesting (or "reverse vesting"), and it's a standard term that trips up many first-time founders. Here's what you need to know.

Why Investors Want Founder Vesting

Investors are betting on you, not just your company. If you leave six months after they invest, they want protection. Founder vesting ensures you stay committed by making you "re-earn" your equity over time.

From the investor's perspective:

• If a founder leaves early, unvested shares return to the company
• This protects against the nightmare scenario of an absent founder owning 30% of the company
• It aligns incentives—founders only get full equity if they stay and build

From your perspective, this feels unfair—you already built the company to this point. But it's a standard term, and investors have good reasons for wanting it.

How Founder Vesting Works

The most common structure is 4-year vesting with a 1-year cliff, but applied retroactively:

Standard terms:

• 4-year vesting schedule
• 1-year cliff (but often waived for founders with history)
• Monthly vesting after the cliff
• Credit for time already served

Example:

• You've been working on the company for 2 years
• You own 50% (5M shares)
• Investor imposes 4-year vesting with credit for 2 years served
• Result: 2.5M shares are immediately vested, 2.5M vest over the next 2 years

What's Negotiable

1. Credit for Time Served

If you've been building for 18 months, you should get credit for 18 months of vesting. This is standard and expected—push back if investors don't offer it.

2. Vesting Period

While 4 years is standard, some founders negotiate for 3 years (especially if they've already been at it for a while). The logic: you're already committed, and a full 4-year restart is punitive.

3. Cliff

The 1-year cliff makes sense for new employees but often doesn't for founders who've already proven commitment. Many founders negotiate to eliminate or reduce the cliff.

4. Acceleration

This is the most important negotiation point. Acceleration means your vesting speeds up under certain conditions:

Single-trigger acceleration: Some or all shares vest immediately upon acquisition. Example: 50% acceleration on change of control.

Double-trigger acceleration: Shares vest only if (1) the company is acquired AND (2) you're terminated or demoted within 12 months. This is more common and more investor-friendly.

Always negotiate for at least double-trigger acceleration. Without it, an acquirer can fire you the day after closing and you lose unvested equity.

What Happens If You Leave

If you leave the company (voluntarily or involuntarily):

• Vested shares: You keep them
• Unvested shares: Return to the company (typically repurchased at the lower of cost or fair market value)

This is why acceleration matters. Without it, even in an acquisition scenario, you might not fully vest.

The 83(b) Election Connection

If you filed an 83(b) election when you first received your shares (you should have), you've already paid taxes on the full value. If you later forfeit unvested shares due to leaving, you don't get that tax money back.

This makes the vesting terms even more important—make sure you understand what you might lose.

Best Practices

1. Negotiate credit for time served. This is standard and should be automatic.

2. Push for shorter vesting if you've been at it a while. If you're 2 years in, argue for 2-3 more years, not a full 4-year restart.

3. Get acceleration provisions. At minimum, double-trigger acceleration for change of control scenarios.

4. Align with co-founders. All founders should have the same vesting terms to avoid weird dynamics.

5. Document everything. Make sure your vesting schedule is clearly documented in the stock purchase or restriction agreement.

The Bottom Line

Founder vesting is standard and reasonable—investors need protection if you leave. But the terms are negotiable:

• Credit for time served is expected
• Reasonable vesting period (accounting for what you've already contributed)
• Acceleration provisions protect you in acquisition scenarios
• Clear documentation prevents disputes later

Don't resent the concept of founder vesting. Instead, negotiate the terms to be fair to both sides.