Yes, co-founders should always impose vesting on their equity. Life happens—one founder may leave early, whether due to a change in circumstances, a disagreement, or simply a loss of interest. If there’s no vesting, that departing founder could walk away with a significant portion of the company’s equity, despite no longer contributing to the business. This situation often creates what’s known as a zombie founder – a former co-founder who still holds a large ownership stake but is no longer involved in the company’s success.
What is vesting?
Vesting is a mechanism that requires founders to earn their equity over time, typically through continued service to the company. A standard vesting schedule is four years with a one-year cliff, meaning a founder must stay at least a year to earn the first 25% of their shares. After that, the remaining shares vest monthly or quarterly over the next three years.
Why is vesting important for startups?
- Prevents zombie founders – If a founder leaves early, their unvested shares return to the company, avoiding unnecessary dilution and ensuring remaining team members are rewarded for their contributions.
- Attracts investors – Investors expect founders to be locked into a vesting schedule. A team with unvested shares is more aligned with long-term success.
- Maintains fairness – Vesting ensures that equity is earned through ongoing work rather than upfront allocation, reducing resentment among remaining founders.
Does vesting mean I don’t own my shares?
No. With proper structuring, founders still technically own their shares, but the company has the right to repurchase unvested shares at cost if a founder leaves before fully vesting.
What is an 83(b) election, and why does it matter?
When imposing vesting, U.S. founders must file an 83(b) election with the IRS within 30 days of receiving their shares. This election tells the IRS to tax the shares at the time of grant rather than as they vest. If an 83(b) election is not filed, founders may owe taxes on each vesting event at the then-current fair market value of the shares, which could lead to a massive tax bill if the company’s value increases.
Bottom line
Vesting is an essential protection for co-founders, investors, and the long-term success of a startup. It ensures that equity is distributed fairly and that only those actively contributing benefit from the company’s growth. Just don’t forget to file your 83(b) election on time!