This article is for startup founders in Ireland who are setting up a company with co-founders or have already incorporated without proper ownership protections in place.If you're wondering whether you need founder vesting, how it actually works, or what happens if a co-founder leaves early, this guide covers why vesting protects everyone, the standard terms investors expect, and when to implement it before it becomes expensive and complicated.
Key Takeaways
• Implement founder vesting at incorporation with standard 4-year terms and 1-year cliff to avoid expensive restructuring later.
• All founders should have equal vesting terms; without vesting, a co-founder leaving early keeps full ownership despite minimal contribution.
• Standard vesting is 4 years with monthly vesting and 1-year cliff where 25% vests immediately after year one.
• Investors require founder vesting before investment; approximately 65% of startups fail due to co-founder conflict and team issues.
• Use reverse vesting where the company can buy back unvested shares at nominal value if founders leave early.
What exactly is founder vesting and how does it work?
Founder vesting is an arrangement where you earn your company shares gradually over time rather than owning them outright from day one. Typically, your shares vest over 4 years, meaning if you leave early, you only keep the shares that have already vested while unvested shares return to the company. For example, with standard 4-year vesting, after one year you'd own 25% of your allocation, after two years 50%, and after four years you'd own your full share percentage.
Do I need founder vesting if I trust my co-founders completely?
Yes, you should implement vesting even with complete trust because circumstances change unexpectedly - people get sick, have family emergencies, or discover startup life isn't for them. Vesting isn't about lack of trust; it's about protecting everyone when unexpected things happen, and roughly 65% of startups fail due to co-founder conflict and team issues. Professional investors and experienced founders expect vesting, and its presence signals maturity rather than distrust.
What is a 1-year cliff and why does it matter?
A 1-year cliff means nothing vests for the first year, then 25% of your shares vest all at once on your one-year anniversary. This tests commitment and prevents situations where founders contribute for just a few months and walk away with shares. After the cliff, the remaining 75% typically vests monthly over the next three years.
When should I implement founder vesting for my startup?
The absolute best time is at incorporation when you first set up the company, as it's expected, has no tax implications, and involves minimal legal costs. If you've already incorporated, implement it as soon as possible and definitely before raising investment, since nearly all investors require founder vesting as a precondition. Adding vesting later becomes expensive, complicated, and creates relationship tension among founders.
Should all founders have the same vesting terms, or can I negotiate different terms for myself?
All founders should have equal vesting terms, including you. Some founders try to negotiate different terms for themselves versus co-founders, but this creates tension and signals lack of trust. By accepting vesting yourself, you ensure your co-founders also accept it, which protects you if they leave early.
What happens to my shares if I leave the company before 4 years?
If you voluntarily leave, you typically keep only your vested shares while unvested shares return to the company. The specific outcome depends on circumstances: termination for cause may result in forfeiting even vested shares, while termination without cause usually means you keep vested shares. Most agreements include provisions for death or disability that often accelerate some or all unvested shares.
What is double-trigger acceleration and should I include it?
Double-trigger acceleration means your unvested shares vest immediately only if both the company is acquired AND you're terminated without cause. This protects you from being fired just before an acquisition to prevent your shares from vesting. Most investors prefer double-trigger acceleration over single-trigger (which vests on acquisition alone), as single-trigger can complicate acquisitions by incentivizing founders to leave immediately after the sale.
Will investors require founder vesting before they invest?
Yes, nearly all investors require founder vesting as a precondition of investment, typically with a standard 4-year schedule and 1-year cliff. If they invest €500,000 for 20% of your company, they want assurance that founders will stick around rather than leaving immediately after investment closes with their full ownership. Expect investors to refuse investment if founder vesting isn't in place or if terms are non-standard without good reason.
Are there tax implications when implementing founder vesting?
There may be tax consequences depending on how vesting is structured and when it's implemented. With reverse vesting (the most common approach in Ireland), if shares are issued at nominal value, there's typically no tax implication when the company's buyback rights lapse as shares vest. However, adding vesting to shares already issued can trigger tax consequences, which is another reason to implement vesting at incorporation when tax is simpler.
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