When early-stage companies begin preparing for a new fundraising round, one topic that frequently arises, and often causes concern among founders, is the issue of founder vesting. Specifically, should a founder be required to revest their shares when new investors come on board?
This question is more than a formality. It sits at the heart of how a founder’s contribution, commitment and long-term alignment with the company are valued by investors and protected in legal documents, specifically the company's articles of association.
What Is Founder Vesting?
Founder vesting is a mechanism designed to incentivise long-term commitment from a company’s founding team. It typically involves the founder's equity being subject to a reverse vesting schedule which is most commonly over four years with a one-year “cliff”. This means a founder does not fully own their shares on day one; instead, they earn the right to keep them over time.
Vesting ensures that if a founder leaves the company early, they do not walk away with a disproportionate share of the equity. It is a fair way to balance risk and reward across the founding team and for investors who are backing the future of the business.
In the event that a founder departs before their shares are fully vested, "leaver provisions" will come into play. These dictate how many of the unvested (or even vested) shares the founder retains or is required to forfeit, depending on the nature of their departure.
Leaver Classifications: Good, Bad, and More
A Company's articles of association and shareholder agreements often categorise founder departures into various types of leaver scenarios, each with its own consequences. These classifications are crucial, as they determine how many shares the departing founder retains.
Here are the main categories typically used:
Bad Leaver
A Bad Leaver is someone who exits the company under unfavourable circumstances. This might include dismissal for gross misconduct, breach of fiduciary duties or resignation without good reason. In most cases, and the BVCA standard approach requires that a Bad Leaver forfeit all of their shares by their shares converting into a worthless class of deferred shares.
Good Leaver
A Good Leaver typically includes a founder who leaves due to reasons beyond their control, such as death, ill health, redundancy or mutual agreement. Good Leavers are often entitled to retain some or all of their vested shares and may receive fair market value if required to sell them.
Intermediate Leaver
An Intermediate Leaver falls somewhere between a Good and a Bad Leaver. This might include a founder who voluntarily resigns before full vesting but without breaching duties. Depending on the specific terms negotiated, an Intermediate Leaver might retain a portion of vested shares but lose unvested shares, or be subject to a discounted buy-back price.
Using Deferred Shares to Handle Leavers More Efficiently
When a founder or employee leaves and is required to give up unvested shares (or even vested shares in some leaver scenarios), the somewhat outdated mechanism was for those shares to be transferred back to the company or to other shareholders. However, this usually involves:
- Preparing and executing stock transfer forms;
- Arranging board approvals; and
- Paying stamp duty, where applicable.
This can be administratively burdensome for the Company, especially if the departing party is uncooperative or no longer actively engaged as they would need to sign the stock transfer form.
A more streamlined alternative is to convert the leaver’s shares into deferred shares which the Company usually has authority to purchase back from the leaver for a nominal amount without the authority of the leaver.
Deferred shares are a class of shares that carry no rights to vote, receive dividends, or participate in any company sale proceeds (beyond a nominal amount, typically 1p or less). In essence, they are economically worthless and effectively ringfence a leaver's equity without requiring a formal transfer.
Why Use Deferred Shares?
- Simplifies the process: No need for signed stock transfer forms or stamp duty.
- Avoids reliance on leaver cooperation: Conversion can be actioned by board and shareholder resolutions, even if the leaver is unresponsive.
- Preserves clean cap table optics: Deferred shares can be isolated from ordinary share calculations, preventing confusion in future rounds.
- Reduces legal and administrative time: Particularly helpful when there are multiple leavers or tight timelines.
In order to use this approach, the company’s articles of association must include provisions allowing for the conversion of ordinary shares into deferred shares. This is something that can be incorporated at an early stage and is well worth considering as part of any vesting and leaver framework.
Revesting in a New Fundraising Round
If you are a founder already two or three years into your initial four-year vesting schedule, you may have built significant value, made sacrifices and helped the company get to where it is.
When the company is raising a new round of funding, investors may request that you revest some or all of your shares as part of the investment terms. From their perspective, this ensures the key founding team remains committed and aligned. But for you, it may feel like being asked to earn your equity all over again.
So, should your vesting clock reset? Not necessarily.
There are several practical ways to balance these concerns:
- Partial Revesting: Instead of resetting your entire vesting schedule, you may agree to revest only a portion of your shares. For example 25% to 50% to reflect the ongoing commitment without disregarding past effort.
- New Vesting for New Grants: If you are issued additional shares as part of the round (to reflect dilution or performance), these can be subject to a new vesting schedule, leaving existing vested shares untouched.
- Accelerated Vesting on Exit: Many articles provide for vesting acceleration upon a sale or IPO and even if there is no express acceleration of the vesting in the articles, if that person is not a leaver on the exit then their shareholding is treated as fully vested as the shares are issued from day one. This ensures you are not penalised for a liquidity event beyond your control.
Drafting Vesting Terms: A Word of Caution
Founder vesting provisions are highly negotiable and often nuanced. It is important to pay close attention to the vesting provisions even at the term sheet stage to ensure that you are comfortable with the investors proposal in respect of your vesting. A small change in wording can significantly impact your rights and financial outcomes. It is essential to ensure your legal documents, including shareholder agreements, articles of association and investment agreements clearly and fairly reflect your position.
Careful legal drafting can:
- define clear leaver categories with sensible outcomes;
- avoid automatic vesting resets during fundraising;
- protect founders from disproportionate clawbacks; and
- offer flexibility for future equity awards or top-ups.
We Are Here to Help
Whether you are preparing for your first fundraising round or negotiating terms for a later stage investment, understanding and structuring founder vesting is vital. Our experienced team works with startups and growth-stage companies to ensure vesting provisions are both founder-friendly and investor-ready.
If you need advice on vesting or fundraising, we are here to help protect what you have built and plan for what comes next.
