Founders should vest too
Vesting is usually described as something that applies to employees, but the more important application is to founders themselves. Founder vesting means each founder earns their own shares over time rather than owning them outright from day one. It sounds counterintuitive to give yourself shares on a schedule, but it is one of the most protective things a founding team can do.
Consider the alternative. Two founders split equity equally, and one walks away after six months. Without vesting, that departing founder keeps a full half of the company for very little contribution. This is known as dead equity. It demoralises the founders who stay, complicates every future decision, and is a red flag that investors will insist on fixing. Vesting solves this by ensuring that equity is earned through continued commitment.
The standard four-year schedule with a one-year cliff
The market convention, used widely in India and globally, is a four-year vesting schedule with a one-year cliff.
- The cliff means nothing vests during the first year. If a founder leaves before the first anniversary, they walk away with zero.
- At the one-year mark, the first block vests in a lump, commonly one quarter of the total.
- After the cliff, the remainder vests gradually, typically in monthly or quarterly instalments over the remaining three years.
This structure filters out early departures while rewarding people who stay for the long build. Indian ESOP law echoes the same logic: Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014 requires a minimum of one year between the grant of options and their vesting, so the one-year cliff is built into the statute for option grants.
Reverse vesting for founders
There is a mechanical difference between how employees and founders vest. Employees are granted options they have not yet received. Founders, by contrast, usually already hold their shares, issued at or soon after incorporation. So founder vesting is structured as reverse vesting.
Under reverse vesting, the founder owns the shares from the start, but the company or the co-founders have the right to repurchase the unvested portion, often at par or the original nominal price, if that founder leaves. As time passes, fewer shares remain subject to repurchase, so the founder progressively secures their stake. Economically it produces the same result as forward vesting, but it fits the fact that the shares are already issued.
In India this is implemented contractually, through the shareholders' agreement or share subscription agreement, using restrictive covenants together with buyback or compulsory transfer provisions triggered by a founder's exit.
What founders should expect
Investors frequently make founder vesting a condition of their term sheet, and it is common for vesting to be reset or refreshed at a financing round so that founders remain committed through the next phase. Many agreements also include acceleration provisions, for example accelerating some or all unvested shares if the company is acquired, so that founders are not penalised at an exit.
The takeaway is simple. Vesting is not a sign of distrust between co-founders. It is a shared insurance policy that keeps equity aligned with the people who actually do the work of building the company.