Company setup and early instruments
Reverse vesting
Founders buy stock on day one, then earn the right to keep it — four years, a one-year cliff, and company repurchase of the rest.
Vesting means you earn the right to keep shares over time. For founders who already purchased stock, the company typically holds a repurchase option on unvested shares at the original purchase price. That is reverse vesting. If you leave, the company buys back what has not vested.
Without vesting, a founder who quits in month six can keep 50% forever while the remaining team builds. That dead equity blocks hiring, blocks fundraising and blocks acquisitions. Vesting is how the cap table stays matched to who is still building.
The big idea
The Silicon Valley default:
- Total period: 4 years
- Cliff: 1 year — nothing vests until month 12; then 25% vests at once
- Thereafter: monthly (or quarterly) vesting of the remainder over the next 36 months
Concept
A cliff is a minimum service period before any equity vests. It protects the company from a co-founder leaving after three months with a huge permanent stake. Reverse vesting applies repurchase rights to stock already issued. Standard employee option vesting instead makes unvested options simply cancel.
File an 83(b) election within 30 days of the stock purchase. For early founders buying at par, that often means little or no current tax, and future appreciation can qualify for capital gains (and sometimes QSBS) from the early holding period. Miss it and each vesting tranche can create ordinary income on the spread between fair value and what you paid.
Walking through a departure
Two founders, 50/50, each purchased 5,000,000 shares. Standard vesting: 4 years, 1-year cliff, monthly thereafter. No acceleration. Co-founder B resigns at month 18.
At 12 months: 25% vested = 1,250,000 shares
Months 13–18: 6 extra months
Monthly vest = 5,000,000 × 0.75 / 36 ≈ 104,167 shares/month
Extra vested: 6 × 104,167 ≈ 625,000 shares
Total vested: 1,250,000 + 625,000 = 1,875,000 shares (37.5%)
Unvested: 5,000,000 − 1,875,000 = 3,125,000 sharesThe company repurchases 3,125,000 unvested shares at the original purchase price (typically pennies). Founder A still holds 5,000,000 (subject to A's own vesting). Fully diluted ownership shifts toward A and the option pool — which is the point of vesting.
If B had left at month 10 (before the cliff), B would vest 0 and the company could repurchase all 5,000,000. That feels harsh in the moment and correct for the team that continues.
Common mistakes
- No vesting. "We trust each other" until someone leaves with 40%.
- Missing 83(b). Irreversible tax shape for the next four years.
- Handshake repurchase. If it is not in the stock purchase agreement, it is not a right.
Check yourself
A founder with 5,000,000 reverse-vesting shares leaves at month 10. How many shares do they keep?
Zero. The one-year cliff has not hit, so the company can repurchase all 5,000,000.
Why is this called reverse vesting instead of ordinary vesting?
The stock is already issued. Vesting is implemented as the company buying unvested shares back, not as options that have not yet been granted.
Key takeaways
- Default vesting is 4 years with a 1-year cliff; founders use reverse vesting via company repurchase.
- Leave before the cliff and you typically keep nothing; at month 18 you keep 37.5% of a standard grant.
- File 83(b) within 30 days of the stock purchase.
- Model departure cases with real share counts before you sign.
Further learning
Next, what happens to unvested shares in a sale: founder acceleration.