Money for Startups: Vesting

In the previous article, we built the cap table — the document that records who owns what in your company. We saw how founders agree on an equity split, authorize shares, and issue restricted stock. We mentioned vesting as something attached to those shares, but we moved past it quickly. Now we are going to slow down and look at it properly.

Vesting is one of those concepts that sounds punishing the first time you hear it. You think you own 50% of the company. You do not — not yet. You are going to earn it over time. That is vesting.

And once you understand why it exists, you will realize it is not punishing at all. It is the thing that protects the company, and you, when something goes wrong.

Why vesting exists

Imagine you and a co-founder each own 50% of the company. Six months in, your co-founder decides they are done. They move on. They stop showing up.

Without vesting, they walk away with 50% of the company. Forever. That means every future investor, every employee, every option you grant — all of it is diluting both of you equally. You are doing all the work. They are collecting the same ownership.

Vesting solves this. It says: ownership is not granted all at once on day one. It is earned through time and continued contribution. If you leave early, you only keep the portion that has vested. The rest goes back to the company.

That is the core idea. Everything else is details.

The standard schedule

Across the technology industry — and most other industries that use equity — vesting is almost universally structured the same way.

Four years. One-year cliff. Monthly or quarterly after that.

Here is what each piece means.

Four years is the total vesting period. After four years of continuous contribution, 100% of your shares are vested. They are yours permanently, regardless of what happens next.

The cliff is the minimum commitment before anything vests. The most common cliff is one year. If you leave on day 364, nothing vests. Zero. On day 365 — the one-year mark — 25% vests all at once. That is the cliff. You either go over it or you do not.

After the cliff, the remaining 75% vests in smaller increments — monthly or quarterly — over the following three years until you hit 100%.

To make it concrete: if you have 1,200,000 shares on a standard four-year, one-year cliff schedule, here is how vesting unfolds.

Period	Event	Shares Vested	Cumulative
Month 12	Cliff reached	300,000	300,000 (25%)
Month 24	Year 2 complete	300,000	600,000 (50%)
Month 36	Year 3 complete	300,000	900,000 (75%)
Month 48	Year 4 complete	300,000	1,200,000 (100%)

After the cliff, vesting typically happens monthly (25,000 shares per month) rather than in annual chunks, so the table above is simplified. The point is the same: you earn your ownership gradually, not all at once.

What happens to unvested shares?

If someone leaves before their shares fully vest, the unvested portion goes back to the company — specifically, into what is called the treasury. It does not automatically redistribute to the remaining founders.

From the treasury, those shares can be reallocated — to a new co-founder, added to the option pool, or used in another way the board approves. The company retains the flexibility to decide.

This is why vesting protects everyone. The founder who leaves keeps what they earned. The company retains what was not yet earned, and can use it to move forward.

Vesting for founders vs. employees

There is an important distinction here.

Founders vest their stock. They receive restricted shares at incorporation, and those shares vest over time.

Employees and future hires typically receive options, not stock directly. Options give them the right to buy shares at a fixed price later. Options also vest — usually on a similar four-year schedule — but the structure and tax treatment are different. We will cover options and the option pool in a separate article.

The short version: vesting applies to both founders and employees, but the instrument is different. Founders get restricted stock. Employees get options.

When does vesting start?

This is a common point of confusion, especially for founding teams that have been working together for a while before formally incorporating.

By default, if you do nothing special, vesting starts at the date of incorporation (look at Before the Money: Nine Steps Every Founder Must Take Before Seeking an Investor ) or the date shares are issued. But many founding teams have already been working for a year or more before they formally set up the company.

For example, if you began building in 2023 but incorporated on January 1, 2025, and your company uses a four‑year vesting schedule with a one‑year cliff, vesting starts on January 1, 2025 — even though you worked for two years before that.

This is where upfront vesting comes in. When you negotiate your first term sheet with an investor, you have the right to ask for credit for time already worked. You say: "we have been building this for two years, and we are entitled to some vesting credit before the clock formally starts."

Many investors will be open to this, especially if the work is documented and the progress is real. The outcome is negotiated — it might be 25% upfront credit, or more. It depends on the leverage you have and the relationship.

The key point is: do not assume. Raise it explicitly. If you do not, you could find yourself in a situation where you have been working for three years and technically none of your stock has vested.

Accelerated vesting

There is one more scenario worth knowing about: accelerated vesting, which kicks in when something big happens.

If the company is acquired — someone wants to buy it — founders and senior executives often negotiate a provision that causes some or all of their unvested shares to vest immediately upon the acquisition. This is called acceleration.

The logic makes sense. You built something valuable enough that someone wanted to buy it. You should not be penalized by having to wait four years for shares that you earned through that outcome.

There are two flavors of acceleration. Single trigger means acceleration happens automatically when the acquisition closes. Double trigger means two things have to happen — the acquisition, and then something like your role being eliminated — before the unvested shares vest. Investors often prefer double trigger because it keeps founders incentivized to stay through the transition period.

Your lawyers will walk you through this when the time comes. For now, just know it exists and that it belongs in your checklist.

When should you set vesting up?

The right answer is at incorporation.

By the time you formally incorporate the company, you and your co-founders should already have agreed on the equity split and the vesting terms. Incorporation is when those agreements become legally real — when restricted stock purchase agreements are signed, shares are issued by the board, and vesting schedules are formally attached.

If you wait until an investor is involved, you will be negotiating vesting under time pressure, with someone else at the table who has their own preferences. Much better to have it clean and agreed-upon before that conversation starts.

What vesting actually protects

It is worth stepping back for a moment.

Vesting feels like a constraint on founders. And in a narrow sense, it is — you do not fully own your shares on day one. But the thing it is protecting against is much worse than the constraint itself.

It protects you from a co-founder who leaves and takes half the company with them. It protects your investors from founders who take their money and walk away. It protects the company's ability to attract future talent and investors with a clean ownership structure. It signals to everyone at the table that the founding team is committed for the long run.

That is not a constraint. That is a foundation.

In the next article, we will go deeper into the option pool — what it is, how it is sized, and why the timing of when you create it matters more than most founders realize.

I hope you found this helpful ♡