Reverse vesting

It's called "reverse vesting", because founder's shares are granted at company formation (so not in fact vested), and there is a base agreement that says that the company can buy back a portion of or all shares – e.g. the company "reverse" vests the right to be able to buy back founder shares at nominal cost.

It's important because if such an agreement is not in place, and a founder leaves, they can leave a huge hole in the cap table: they own 20-30-50% of the company and have no obligation to give it back, or might even demand to be paid out. Agreeing to this up front at company formation with all founders makes it clear what the base line is.

The company / other founders could still decide to do better than what is written down – e.g. someone leaves after 6 months but has done impactful work, so the company/other founders decide to grant some percentage of stock. But, the base line agreement is understood and agreed to.

A typical reverse vesting schedule would look like a one year cliff (e.g. if you leave before a year is up, you get nothing), 25% vested at 1 year, and then vesting monthly over the next 3 years / 36 months.


Tech startups usually grant shares subject to vesting conditions (or use options) in order to solve the problem of a founder leaving and taking their shares with them. The shares are either issued immediately subject to the company buying the shares back later under certain conditions (a reverse vesting agreement) or are granted over time (a vesting agreement).


The decision as to vesting vs. reverse vesting is largely tax-driven but granting shares immediately may make stakeholders feel like they're more of a team (there's a big emotional aspect to starting a company). In Canada, the potentially massive tax advantage to getting shares upfront (i.e. reverse vesting) is taking advantage of the $750k lifetime capital gains exemption for CCPCs (talk to your accountant).

Cameron Huff Vesting Agreement Terms for Tech Startups

Founder vesting is the concept that a founder’s ownership of the company is earned over time, like a salary.

Technically speaking, this is ‘reverse’ vesting – a founder has shares at the beginning, but if the founder leaves the company, decreasing proportion of the shares held by the founder (related to the time the founder has been with the company) have to be sold back to the company, usually at no profit. What does vesting mean for founders?


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