Key points
- Vesting makes a founder’s right to keep all of their shares conditional on their continued presence in the company over a defined period, as set out in the shareholders’ agreement.
- Unlike BSPCE (French start-up share warrants) or AGA (free shares), founder vesting does not grant future shares: the founder owns the shares from the outset but must transfer back the portion not yet vested if they leave.
- The mechanism rests on three parameters: a total duration (often four years), an initial one-year cliff with no vesting, then a vesting schedule that is generally linear, on a monthly or quarterly basis.
- The transfer-back price depends on how the departure is classified: a good leaver is often bought out at market value, while a bad leaver’s shares are bought back at a reduced value, sometimes at par.
- The firm recommends listing precisely the events that trigger the bad leaver regime rather than relying on generic wording, which leads to disputes.
Among the questions we deal with most often for start-up founders, vesting comes up early. It arises when the company is set up, it returns at the first fundraising, and it resurfaces, often in less calm circumstances, when a co-founder leaves the company before having “earned” all of their shares.
The logic of vesting is simple: founders keep their shares progressively, according to their presence and contribution over time. If one of them leaves early, part of their shares can be transferred back to the company or bought by the other shareholders, on terms defined in advance. This mechanism protects the company and the remaining co-founders. In its own way, it also protects the departing founder, by ensuring that the terms of their exit are known from the start and do not depend on the balance of power at the time.
The vesting must still be properly structured. A poorly documented mechanism, or one whose terms do not match the reality of the situation, can become a source of conflict exactly where it was meant to prevent one.
What is founder vesting?
Founder vesting is a contractual mechanism under which a founder’s right to keep all of their shares is conditional on their continued presence in the company over a defined period. It is not a mechanism for granting future shares like BSPCE or AGA: the founder does own their shares from the outset. But if they leave the company before the end of the vesting period, they must transfer back the portion of their shares not yet “vested”, at a price defined in the agreement.
This distinction matters. Founder vesting does not create rights to issue new shares. It organises the conditional transfer back of existing shares. It is essentially a contractual mechanism, which belongs in the shareholders’ agreement.
How founder vesting works: cliff, vesting period, schedule
A typical vesting mechanism rests on three parameters.
Total vesting period
This is the period over which rights vest progressively. In the start-up ecosystem, four years is the most common duration. It may vary depending on the company’s stage, investors’ expectations and negotiations between co-founders.
The cliff
This is an initial period, generally one year, during which no rights vest. If the founder leaves the company before the cliff expires, they must transfer back all of their shares subject to vesting. Once the cliff has passed, rights vest in a single tranche for the elapsed period, then progressively over the remainder of the period.
Vesting schedule
After the cliff, rights generally vest on a linear basis, month by month or quarter by quarter, until the end of the total vesting period. A founder who leaves the company after two years on a four-year vesting with a one-year cliff will have vested half of their rights and must transfer back the other half.
The transfer-back price: the heart of the negotiation
Setting the price at which shares are transferred back in the event of early departure is one of the most sensitive points of the mechanism. It depends directly on how the departure is classified: good leaver or bad leaver.
A founder who leaves on good terms (resignation for legitimate personal reasons, end of role by mutual agreement, illness, disability) may be bought out at the market value of the shares transferred back. This is the good leaver regime.
A founder who leaves on unfavourable terms (serious misconduct, breach of the agreement, direct competition, clear bad faith) may see their shares transferred back at a significantly reduced value, or even at par. This is the bad leaver regime.
Defining precisely what constitutes a bad leaver is a delicate exercise. A definition that is too broad exposes any departure to an unfavourable classification. A definition that is too narrow does not sufficiently protect against genuinely wrongful conduct. We recommend listing precisely the events that trigger the bad leaver regime rather than relying on generic wording.
Which documents does founder vesting require?
Founder vesting is most often organised in the shareholders’ agreement, in the form of unilateral promises to sell granted by each founder (Article 1124 of the French Civil Code (Code civil) (in French)). In an SAS (simplified joint-stock company), the articles of association may also require a shareholder to transfer their shares (Article L. 227-16 of the French Commercial Code (Code de commerce) (in French)). A mere verbal agreement would be difficult to prove and to enforce. The clause must specify at least: the total vesting period, the length of the cliff, the vesting schedule after the cliff, the events constituting good leaver and bad leaver, the transfer-back price applicable in each case, the implementation procedure (notification, time limit, who may exercise the buy-back right), and the payment terms.
A clause that is incomplete on any of these points may make the mechanism unenforceable or open to challenge just when it should apply. In practice, a vesting provided for in principle but without a share valuation method may prove impossible to implement without a fresh dispute between shareholders.
Vesting required by investors
In a fundraising round, institutional investors very frequently ask for the founders to be subject to a vesting mechanism. If the company does not yet have one, it is often a condition for investing. If it does, the investor may ask for a reset (vesting starts running again from the closing date) or an extension of the remaining period.
Negotiating these terms is part of the discussions on the term sheet and the shareholders’ agreement. Some founders discover at this point that their initial vesting was insufficiently documented or structured in a way that does not fit investors’ expectations. Dealing with this point before entering a fundraising process is far more comfortable than handling it in a rush.
When should founder vesting be put in place?
The short answer: when the company is set up, before the shares have gained value and before relations between co-founders come under strain. A vesting negotiated calmly, in a climate of trust, is far more balanced than one negotiated during a fundraising round under time pressure, let alone during a crisis between shareholders.
If the company already exists and no vesting has been put in place, it is not too late, but the window narrows as the value of the shares rises and relations between shareholders become more complex. It is better to regularise the situation at a neutral moment (revision of the agreement, arrival of a new shareholder) than to wait for a triggering event.
For assistance in structuring your shareholders’ agreement or preparing your fundraising, our team is available to analyse your situation and propose a suitable mechanism.
For assistance: corporate lawyer in Paris.
