Module 3 of 6 — Founders' Agreements and Startup Legal Setup

Vesting: Cliff, Schedule, and Acceleration

Reading module · approx 13 min

Vesting is the mechanism by which a founder's equity is earned over time rather than being fully owned from day one. It protects co-founders from each other (a departing founder doesn't walk away with a large equity stake without having contributed proportionately), and it protects investors from a founder who takes the money and exits.

How vesting works

In a vesting arrangement, a founder's equity is legally issued in full at incorporation but is subject to a company right to repurchase (reverse vesting, also called "buy-back rights") in the event the founder departs before the vesting schedule is complete. The company can repurchase unvested shares at the original issue price (typically the face value) — effectively clawing back the unvested equity without paying for it.

Under Indian company law, a reverse vesting mechanism is implemented through:

An agreement in the founders' agreement that unvested shares will be transferred to the company or a designated transferee at face value on departure
Share escrow arrangements where the unvested shares are held by an escrow agent or the company until vesting
In more sophisticated structures, share subscription agreements with clawback provisions

The typical vesting schedule

The industry standard for founder vesting in India is a 4-year vesting schedule with a 1-year cliff:

1-year cliff: no equity vests for the first 12 months. If the founder departs before the cliff, all equity is unvested and can be repurchased. This protects against a co-founder who exits very early but has already received a large stake.
Monthly vesting after the cliff: after the 12-month cliff, equity vests at 1/48th per month for the remaining 36 months. At 12 months, 25% has vested; at 24 months, 50%; at 36 months, 75%; at 48 months, 100%.

Some startups use a quarterly vesting schedule (1/16th per quarter after the cliff) for simplicity.

The cliff: what it is and why it matters

The 1-year cliff is the most important feature of the vesting schedule. It ensures that a founder who leaves in the first year receives no equity at all. Without a cliff, a co-founder who departs after 2 months would still have vested 2/48 of their equity — a meaningful stake for minimal contribution.

Acceleration provisions

Acceleration allows unvested equity to vest early on the occurrence of specified events:

Single-trigger acceleration: vesting accelerates on a single event, typically the acquisition of the company. This means a founder whose company is acquired gets all unvested equity upfront. Investors dislike this because it reduces the incentive for founders to stay on and help the transition.
Double-trigger acceleration: vesting accelerates only when two events occur: (1) acquisition of the company, AND (2) the founder is terminated without cause within a specified period after the acquisition. This is the standard in investor-friendly documents.

Good leaver / bad leaver provisions Founders' agreements often distinguish between "good leavers" (departing due to death, disability, or termination without cause) and "bad leavers" (departing voluntarily or after termination for cause). Good leavers typically get to retain their vested equity and receive fair market value for unvested equity. Bad leavers may have all unvested equity repurchased at face value and may have their vested equity subject to additional restrictions. The specific definitions matter enormously — an overly broad "bad leaver" definition can deprive a legitimately departing founder of equity they worked years to earn.

Vesting for solo founders

Solo founders who do not have co-founders still benefit from implementing a vesting schedule before taking external investment. Investors almost always require that the founder's equity be subject to a vesting schedule as a condition of investment. The rationale: investors are investing in the founder as much as the product — a founder who owns their full equity free and clear could leave the day after investment with no consequence. Founders who implement vesting proactively (rather than waiting for investors to impose it) often negotiate better terms.

Module 4 covers IP assignment — the obligation to ensure that all intellectual property created by founders is owned by the company, not by the individuals.