Definition
Founder Vesting
Founder vesting is the arrangement under which founders' own shares vest over time, so a departing founder forfeits unvested equity.
Investors often insist that founders subject their shares to a vesting schedule (commonly four years, sometimes with a portion vested upfront for time already served). This protects the company and remaining founders if a co-founder leaves early, preventing 'dead equity' from sitting with someone no longer contributing.
Founder vesting is negotiated in the term sheet and shareholders' agreement. Reverse vesting — where founders technically own the shares but the company can buy back the unvested portion at cost on departure — is the typical legal mechanism in India.
Related terms
- VestingVesting is the schedule over which an employee or founder earns the right to their granted equity or options.
- Cliff (Vesting)A cliff is an initial period, usually one year, before any of an employee's equity begins to vest.
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.