Why Co-Founder Equity Vests Over Four Years With a One-Year Cliff

A co-founder agreement settles three things that will follow founders for years: who owns what, when that ownership transfers, and what happens if someone leaves. The answers matter because founders often get them wrong before they understand why they matter.

The mechanics are mostly standardized across the startup world because investors expect them. But the details—the cliff, the vesting schedule, the 83(b) election deadline, and the repurchase rights agreement—each solve specific problems that surface later if founders miss them now.

The Standard Vesting Schedule: Four Years with a One-Year Cliff

The industry standard is four years of vesting with a one-year cliff, and it applies to nearly every startup that takes outside investment. On the day founders receive their shares, nothing vests. For 12 months, if a founder leaves for any reason, the company repurchases all their shares at the original price—usually nominal or zero. This period is the cliff.

At the one-year anniversary, the first 25 percent of shares vest automatically. From month 13 through month 48, the remaining 75 percent vests in equal monthly increments: 1/48th of the total each month. The cliff solves a specific problem. Without it, a co-founder could leave after six months having vested 12.5 percent of their shares, still benefiting from the early stage even though they contributed little.

Investors expect this structure because it ensures founders are incentivized to stay and continue building. A founder without vesting looks like someone who is already taking their gains off the table, which raises questions about commitment.

The Standard Founder Vesting Schedule
Founders typically vest 25% of their shares at the one-year cliff, then 1/48th of total shares each month for the following 36 months. Leaving before the one-year cliff means forfeiting all shares.

Determining Your Equity Split

If two or three co-founders commit full-time at the same time from roughly similar financial positions, an equal split is usually right. Early-stage justifications—who had the idea, who started first, who took lower salary—amount to trivial contributions compared with the seven to ten years required to build real company value.

Legitimate exceptions exist when contributions are genuinely asymmetrical. If one founder works full-time and another part-time, or if one founder brings critical intellectual property or substantial capital, that supports an unequal split. But the imbalance should reflect the ongoing commitment, not early-stage work that everyone else will also do.

The important protective mechanism isn’t the equity split itself—it’s vesting. Rather than give one founder a higher percentage to protect against the other leaving, both founders should have equal ownership, both subject to the same four-year vesting schedule. This approach signals to employees and investors that the CEO values team stability.

Good Leaver and Bad Leaver Provisions

Co-founder agreements distinguish between two categories of departure, each with different consequences. A good leaver is a founder who is terminated without cause, leaves due to death or disability, or sometimes leaves voluntarily for personal reasons agreed to by the board. Good leavers retain their vested shares, meaning equity they have already earned belongs to them outright.

For unvested shares, the company may have a right to repurchase at fair market value—sometimes over a window of 6 to 12 months rather than immediately—rather than the nominal price a bad leaver faces. A bad leaver is terminated for cause, abandons the company, or breaches their duties. The company can repurchase all shares—vested and unvested—at the original purchase price, which is usually zero or close to it.

The distinction protects the company and remaining founders from co-founders who try to hold shares hostage or who failed their obligations. Without a bad leaver clause, a founder who stops showing up could still retain unvested shares, creating disputes over valuation and ownership at later financing rounds.

Early-stage justifications—who had the idea, who started first, who took lower salary—amount to trivial contributions compared with the seven to ten years required to build real company value.

The 83(b) Election: A Critical 30-Day Deadline

Founders who receive restricted stock subject to vesting must file an 83(b) election with the IRS within 30 days of receiving their shares. This brief form permanently changes how they are taxed on that equity.

Without an 83(b) election, founders pay ordinary income tax each time shares vest. A founder receiving stock at a nominal price might pay hundreds of thousands in ordinary income tax as shares vest over four years. With an 83(b) election filed on time, founders pay income tax once on the grant-date value (usually minimal) and pay capital gains tax on any appreciation after that.

The deadline is strict: 30 calendar days from the date shares transfer, not business days. Weekends and holidays count. If day 30 falls on a weekend or federal holiday, the deadline extends to the next business day, but one day late has no relief. Many founders learn about this requirement too late, sometimes long after the deadline has passed.

The Repurchase Rights Agreement

For vesting to have any legal force, the company must have a written agreement granting it the right to repurchase unvested shares if a founder leaves. Without this agreement, shares may be labeled unvested on the cap table, but the company has no legal recourse if a founder refuses to forfeit them.

This document is typically called a stock restriction agreement and specifies the vesting schedule, the cliff period, the repurchase price for unvested shares, and the terms by which the company exercises its repurchase rights. Investors check for this agreement during due diligence and expect all founder shares to be subject to it.

The agreement also documents whether vesting begins on the date the company is incorporated or on the date the founder formally begins work. Some founders negotiate vesting credit for work done before incorporation, shifting the vesting start date backward by weeks or months. Without a repurchase rights agreement in place and signed by every founder, vesting is an aspiration, not a fact.

Photo: Mack Male from Edmonton, AB, Canada · CC BY-SA 2.0 · via Wikimedia Commons