Founder Vesting: Why It's Good for You, Not Just Investors

Vesting isn't just for employees. It's a smart, risk-aware structure for startup founders as well. While it might feel counterintuitive to give up immediate control of your equity, founder vesting aligns long-term incentives, protects the business and signals seriousness to investors. The founders we see avoiding vesting are often the same founders who later regret it.

What is founder vesting?

Founder shares are issued upfront, but subject to forfeiture or buy-back if the founder leaves before a certain period (the "vesting schedule"). The shares technically belong to the founder from day one, but they only "vest" (become unconditionally retained) over time.

Vesting can apply to all founder shares or to a portion. The structure depends on the founder's role, the stage of the business and the agreement between the founders.

Standard vesting structures

The most common founder vesting structures are:

• Three- to four-year vesting with a 12-month cliff
• Monthly or quarterly vesting thereafter
• Triggers for acceleration (e.g. sale of company, redundancy, dismissal without cause)

The 12-month cliff means that no vesting occurs in the first year. If the founder leaves in the first 12 months, all shares are forfeited. After the cliff, vesting typically continues at a steady pace (e.g. 1/36th per month for the remaining three years).

Why founders should embrace vesting

Demonstrates commitment to investors. Sophisticated investors expect founder vesting. Without it, they fear that one founder may walk away early and leave the others holding the burden. Investors will frequently impose vesting as a condition of investment if it is not already in place.

Protects the business if a co-founder exits early. Without vesting, a co-founder who leaves after six months walks away with the same equity as a co-founder who builds the business for 10 years. This is unfair, and it is also bad for the business: the remaining founders are diluted by someone who is no longer contributing.

Encourages long-term alignment. Vesting changes the calculus for each founder. Equity is earned over time, not given upfront. This focuses every founder on the long-term success of the business.

Provides structure for difficult moments. When a founder needs to leave (or be asked to leave), the vesting framework provides a clear basis for what happens to their equity. Without that framework, departures often become disputes.

Signals seriousness. Founders who agree to vesting at the start signal that they are committed for the long term. This builds trust within the team and with investors.

Good leaver / bad leaver

Vesting frameworks typically distinguish between good leavers and bad leavers:

Good leavers (death, disability, redundancy, dismissal without cause): typically retain vested shares, may have unvested shares accelerate, and any forfeiture or buy-back is at fair value.

Bad leavers (resignation, dismissal for cause, breach of agreement): typically lose all unvested shares, and may have vested shares subject to buy-back at a low value.

These distinctions need to be carefully defined and fairly applied. The drafting matters.

Documentation

Founder vesting must be properly documented. This includes:

• The shareholders' agreement, which sets out the vesting schedule, triggers and consequences
• The company constitution, which must support the vesting mechanics (forced transfers, buy-backs)
• Founder share certificates and registers
• Board approvals at the time of issue and at vesting events

Without proper documentation, the vesting may be unenforceable. Worse, the parties may disagree about what was agreed.

Common questions

"Can I issue myself shares now and worry about vesting later?" Yes, but it gets harder. Adding vesting after the shares are issued can have tax consequences and may need shareholder approval. Better to set it up at the start.

"What if my co-founders refuse to accept vesting?" A founder who refuses vesting is often signalling something about their own commitment. It is a useful conversation to have early.

"Can I have different vesting for different founders?" Yes. Differential vesting is common, particularly where founders are joining at different times or making different contributions.

"What happens at IPO?" ASX-imposed escrow may apply to founder shares for up to two years post-listing. Vesting and escrow are separate concepts but can interact.

Common pitfalls

• Avoiding the conversation, leaving everyone exposed
• Inadequate documentation of vesting terms
• Confusing vesting with escrow or other restrictions
• Vesting structures that do not match the founders' actual commitment
• Ignoring tax implications of forfeitures and buy-backs

How Luma Legal can help

We advise founders on whether and how to structure founder vesting, draft the necessary provisions in shareholders' agreements and constitutions, and support founders through difficult transitions. Our role is to help you put the structure in place that protects the business and the relationships, even when (especially when) circumstances change.