If you’re starting a company with co-founders, one of the most important conversations you’ll have — and one of the most commonly avoided — is about vesting. Specifically: what happens to a founder’s equity if they leave?

It’s an uncomfortable topic when everyone is excited and aligned. But startups are long games, and people’s circumstances change. Vesting schedules exist to protect the company, the remaining founders, and future investors from the fallout when they do.

What Is Vesting?

Vesting is the process by which a founder (or employee) earns their equity over time. Rather than owning their full allocation of shares outright from day one, the shares are subject to conditions — typically continued involvement in the business over a set period.

If a founder leaves before their shares have fully vested, the unvested portion is forfeited or bought back by the company (usually at cost or nominal value). The founder keeps whatever has already vested.

The core idea is simple: equity should be earned, not gifted.

Why Founders Need Vesting

The most common objection I hear is: “But we started this together — why would we need vesting?” The answer is that vesting isn’t about distrust. It’s about alignment.

Consider this scenario: three founders incorporate a company and split the equity equally — 33.3% each. Six months later, one founder decides the startup life isn’t for them and walks away. Without a vesting arrangement, that departing founder still holds a third of the company. They’ve contributed six months of work but hold the same stake as the founders who will spend the next five years building the business.

This is the “free rider” problem, and it’s one of the most common sources of founder disputes in early-stage companies.

Vesting solves this by ensuring that equity is tied to ongoing contribution. If a founder leaves early, their unvested shares are returned to the company’s pool, preserving equity for the people actually building the business.

Investors Expect It

It’s worth noting that most sophisticated investors — angel investors, VCs, and accelerator programs — will require or strongly encourage founder vesting as a condition of investment. From an investor’s perspective, they’re backing the team. If a key founder can walk away with a large equity stake and no obligation to contribute, that’s a significant risk to their investment.

If you’re planning to raise capital, having vesting arrangements already in place signals maturity and good governance.

The Standard Vesting Structure

While there’s no single “correct” vesting schedule, the market standard for Australian startups has converged around a common framework:

Four-Year Vesting Period

The total vesting period is typically four years. This aligns with the general expectation that it takes at least four years to build meaningful value in a startup, and it’s consistent with what investors are accustomed to seeing.

One-Year Cliff

The “cliff” is a minimum period that must pass before any shares vest at all. The standard cliff is 12 months.

Here’s how it works in practice: if a founder has 100,000 shares vesting over four years with a one-year cliff, the schedule looks like this:

• Months 0–12: No shares vest. If the founder leaves during this period, they forfeit all unvested shares.
• Month 12: 25,000 shares vest in a single block (25% of the total allocation).
• Months 13–48: The remaining 75,000 shares vest in equal monthly or quarterly instalments.

The cliff serves as a probationary period. It protects against the situation where a co-founder joins, contributes for a few months, and then departs with a meaningful equity stake.

Monthly or Quarterly Vesting

After the cliff, shares typically vest on a monthly or quarterly basis. Monthly vesting is slightly more founder-friendly (equity accrues more smoothly), while quarterly vesting is simpler to administer. Either is acceptable — the key is that it’s clearly documented.

Structuring Vesting in Practice

In Australia, founder vesting is typically implemented through one of two mechanisms:

1. Shareholders Agreement Provisions

The most common approach is to include vesting provisions directly in the shareholders agreement. The shares are issued to the founder upfront, but the agreement includes a right for the company (or the other founders) to buy back unvested shares at nominal value if the founder departs.

This is the simpler and more cost-effective approach, and it’s what we recommend for most early-stage startups.

2. Restricted Share Agreements

A more formal approach involves issuing shares subject to a separate restriction deed or restricted share agreement. The shares may be held in escrow or subject to a holding lock until they vest. This approach provides stronger protections but involves additional documentation and administration.

Reverse Vesting

It’s worth clarifying that founder vesting in Australia almost always operates as “reverse vesting.” The founder is issued all their shares at incorporation, but the company retains the right to buy back unvested shares if the founder leaves. This is distinct from forward vesting (common in employee share schemes), where shares are granted progressively as they vest.

Reverse vesting is preferred for founders because:

• The founder is a registered shareholder from day one (important for voting rights and company governance).
• It avoids the need to issue new shares at each vesting milestone.
• It simplifies the tax position at the time of share issuance (more on this below).

Good Leaver vs Bad Leaver

One of the most critical — and most negotiated — aspects of any vesting arrangement is the distinction between “good leavers” and “bad leavers.”

Good Leaver

A good leaver is typically a founder who departs due to circumstances that aren’t their fault or aren’t considered harmful to the company. Common good leaver triggers include:

• Death or permanent incapacity
• Termination without cause
• Redundancy
• Mutual agreement

Good leavers are usually treated more favourably. In many arrangements, a good leaver retains all of their vested shares and may even receive accelerated vesting on some or all of their unvested shares.

Bad Leaver

A bad leaver is a founder who departs under circumstances considered harmful or voluntary. Typical bad leaver triggers include:

• Voluntary resignation
• Termination for cause (fraud, breach of duty, serious misconduct)
• Breach of non-compete or confidentiality obligations
• Conviction of a criminal offence

Bad leavers face harsher consequences. In some agreements, a bad leaver forfeits not only their unvested shares but also some or all of their vested shares. The buyback price for a bad leaver’s shares is often nominal value (e.g., the original issue price of $0.001 per share), regardless of the company’s current valuation.

Getting the Definitions Right

The distinction between good and bad leaver is one of the most important negotiations in any shareholders agreement. Founders should pay close attention to:

• Whether voluntary resignation is always classified as bad leaver (sometimes founders negotiate for resignation after a certain period to be treated as good leaver).
• Whether there’s a middle category (sometimes called a “standard leaver”) with intermediate consequences.
• The buyback price for each category — nominal value, fair market value, or somewhere in between.

Acceleration Clauses

Acceleration refers to the early vesting of unvested shares upon certain trigger events. There are two types:

Single Trigger Acceleration

Unvested shares accelerate on a single event — most commonly a change of control (i.e., the company is acquired). If single trigger acceleration applies, all unvested shares vest immediately upon the acquisition.

Double Trigger Acceleration

Unvested shares accelerate only if two events occur: (1) a change of control, and (2) the founder is terminated or constructively dismissed within a specified period after the acquisition (typically 12 months).

Double trigger is generally preferred by investors because it ensures founders remain incentivised to stay through a transition period after an acquisition. Single trigger can create perverse incentives — founders might push for an early exit to crystallise their unvested equity.

For most Australian startups, we recommend double trigger acceleration as the default, with the option to negotiate single trigger for specific circumstances.

Tax Implications in Australia

The tax treatment of founder vesting in Australia is an area where getting advice early matters. Here are the key considerations:

Division 83A — Employee Share Schemes

If a founder is also an employee or director of the company, the vesting arrangement may fall within Division 83A of the Income Tax Assessment Act 1997 (Cth), which governs employee share schemes (ESS). Under Division 83A, there may be income tax consequences when shares vest (rather than when they’re disposed of).

However, for most founder situations — where shares are acquired at incorporation at nominal value — the practical tax impact under Division 83A is often minimal, because the discount (the difference between the market value and what was paid) at the time of acquisition is negligible.

Capital Gains Tax

The more significant tax consideration for founders is CGT. When a founder eventually sells their vested shares, they’ll be subject to CGT on the gain. The CGT discount (50% for individuals who hold shares for more than 12 months) will apply to shares that have been held for the required period.

Importantly, the CGT clock typically starts from the date the shares were originally acquired (not the date they vested), which is another advantage of reverse vesting — founders get the benefit of the holding period from incorporation.

Small Business CGT Concessions

Founders should also be aware of the small business CGT concessions under Division 152 of the Income Tax Assessment Act 1997. These concessions can significantly reduce or eliminate CGT on the sale of shares in qualifying small businesses. The eligibility criteria are complex, but for early-stage startups, these concessions can be extremely valuable.

Important: Tax treatment depends on individual circumstances. Always obtain specific tax advice before implementing vesting arrangements.

Common Mistakes to Avoid

Having advised hundreds of startups on equity structuring, here are the mistakes I see most frequently:

1. No Vesting at All

The single biggest mistake. Every co-founded startup should have vesting in place from day one. It’s not a sign of distrust — it’s a sign of professionalism.

2. Starting Vesting Too Late

If you’ve been working on your startup for 12 months before formalising equity arrangements, make sure the vesting schedule includes credit for time already served. Backdating the vesting commencement to the date founders actually started contributing is both fair and common practice.

3. Identical Terms for All Founders

Not all founders contribute equally. A full-time technical co-founder building the product shouldn’t necessarily have the same vesting terms as a part-time adviser who contributed the initial idea. Tailor the vesting schedule to reflect each founder’s expected contribution.

4. Ignoring the Buyback Mechanism

It’s not enough to say “unvested shares are forfeited.” You need a clear, enforceable mechanism for the company to buy back unvested shares. This means specifying the buyback price, the process, and the timeline. Under Australian corporate law, share buybacks must comply with the requirements of the Corporations Act 2001 (Cth), including the provisions in Part 2J.1.

5. Forgetting Acceleration

Without acceleration clauses, founders face the unfair situation where their unvested equity is effectively wiped out in an acquisition — even though the acquisition only happened because of their work.

Practical Steps for Founders

If you’re setting up a startup and want to implement vesting properly, here’s a practical checklist:

1. Discuss vesting early. Have the conversation with your co-founders before incorporation, or as soon as possible after.

2. Agree on the key terms. Duration (3–4 years), cliff (6–12 months), vesting frequency (monthly or quarterly), and any milestone-based components.

3. Define good and bad leaver. Be specific about what triggers each category and what the consequences are.

4. Include acceleration provisions. At minimum, double trigger acceleration on change of control.

5. Document everything in your shareholders agreement. Vesting provisions should be a core component of your shareholders agreement, not a side arrangement.

6. Get legal and tax advice. The interaction between corporate law, tax law, and commercial objectives means this isn’t an area for DIY templates.

7. Review periodically. As your startup evolves — new co-founders join, investment rounds close, the business pivots — revisit your vesting arrangements to ensure they still make sense.

Conclusion

Vesting isn’t glamorous, and it’s rarely the topic founders want to discuss when they’re excited about building something new. But getting your equity structure right from the start is one of the highest-value things you can do for your startup. It protects the company, aligns incentives, and gives investors confidence that the founding team is committed for the long haul.

If you’re setting up a startup and need help structuring your founder equity and shareholders agreement, get in touch. It’s one of the things we do most, and we’re always happy to chat.