Vesting

Also called Founder vesting, Cliff, Reverse vesting

Earning your shares over time rather than owning them all on day one. Protects the people who stay.

What it means

Vesting means equity is earned over a period of continued involvement. A common structure is four years with a one-year cliff: nothing vests for twelve months, then a quarter vests at once, then monthly thereafter.

For founders it is usually structured in reverse — you hold the shares, but the company can buy back the unvested portion if you leave.

Why it matters

It answers the question nobody wants to ask at the start: what happens if one of us leaves in six months?

Without it, a co-founder who leaves early keeps their full stake. They contribute nothing further and take a full share of everything the remaining founders build, and every future investor will see it on the cap table and ask about it.

What it looks like in practice

Agree it at the outset, when everyone is optimistic and nobody is negotiating against a known outcome. It is much harder to introduce later.

Distinguish good leavers from bad leavers, with different treatment of vested shares — this belongs in the shareholders' agreement.

Employee options usually vest on a similar schedule; look at EMI for the tax-advantaged UK scheme.

What to watch out for

Tax. How and when shares are issued affects whether there is an income tax charge, and a section 431 election is often needed within fourteen days of acquisition. Missing it is expensive and irreversible.

Acceleration on a sale, which can be single-trigger or double-trigger. Investors care about this and it is negotiated.

Where to get proper advice

A corporate solicitor and a tax adviser together — the legal structure and the tax treatment have to be designed as one thing.