In the startup world, equity isn’t just about ownership, it’s about commitment and building together for the long haul.
But what if a co-founder or an employee who holds equity leaves after a few months of joining or getting the equity? Should they walk away with a substantial stake in a company they’re no longer helping to build?
That’s where vesting comes in.
Vesting means your equity is earned gradually, over time. It protects the company and the remaining team by making sure that only those who stick around and contribute get their full share.
What Is Vesting?
Vesting is a mechanism that ties equity to time, contribution, or milestones.
Instead of giving someone their full equity on Day 1, vesting distributes ownership over a defined period so that people earn their stake by staying and building.
Vesting clauses are commonly included in founder agreements, employee stock option plans (ESOPs), and investor requirements.
Typical Vesting Terms
| Term | Meaning |
|---|---|
| Vesting Period | Total time over which equity is earned (usually 4 years) |
| Cliff | Minimum period before any equity vests (usually 1 year) |
| Monthly Vesting | After the cliff, equity vests monthly or quarterly |
| Accelerated Vesting | Equity vests faster upon specific triggers (e.g. acquisition) |
Example: Founder Vesting
- You and your co-founder each have 50% equity.
- Both are subject to 4-year vesting with a 1-year cliff.
- If your co-founder leaves after 6 months:
→ They get 0% (since they didn’t clear the 1-year cliff). - If they leave after 2 years:
→ They’ve earned 50% of their 50% = 25% equity.
That unvested equity is typically returned to the company or reallocated.
Why Vesting Matters
For Founders:
- Protects the company if a co-founder leaves too soon
- Motivates co-founders to stay and contribute long-term
- Avoids inactive owners holding equity
For Investors:
- Signals maturity and alignment
- Ensures only active contributors hold significant ownership
For Employees (ESOPs):
- Offers a clear reward timeline
- Encourages retention
- Links upside to contribution
India-Specific Vesting Insights
- Founders are often asked to sign vesting clauses in shareholder agreements, especially at Series A and beyond.
- ESOPs in India commonly follow a 4-year vesting with 1-year cliff, with post-exit buyback clauses.
- SEBI-regulated startups or listed entities may have additional disclosure requirements for vesting and buybacks.
Founders should proactively include vesting in their early agreements before investors make it mandatory.
Vesting vs Ownership
Vested equity = what you’ve earned
Granted equity = what you’ve been promised
Until shares are vested, they can usually be taken back or changed under most agreements.
Common Mistakes
- Not setting up vesting for founders from Day 1
- Granting equity to advisors without clear deliverables or time commitment
- Ignoring vesting cliffs in ESOPs, leading to sudden unexpected dilution
Final Thought
Equity should follow effort.
Vesting is about fairness, alignment, and protecting what you’re building.
Vesting creates clarity and long-term commitment for all stakeholders including co-founders, early employees and investors.