How does founder vesting work?

What founder vesting actually is

Founder vesting means founders earn their shares over time. In Canada it’s usually done as reverse vesting: each founder subscribes for and owns all of their shares at the start, and agrees that if they leave before a set date, the company (or the other shareholders) can buy back the shares that haven’t vested yet, usually at the price the founder paid.

That’s different from employee stock options, where the person owns nothing until the option vests and they pay to exercise it. Founders hold real shares, vote them and are on the cap table from day one. Vesting only decides how many of those shares they keep if they leave.

What a typical vesting schedule looks like

A common schedule is four years with a one-year cliff: nothing vests in the first year, a quarter vests on the first anniversary, and the rest vests monthly over the next three years. It’s common, not required. Founders can choose any schedule they agree on.

Some variations we see:

• Credit for time already served. If you’ve been building for a year before incorporating, a portion can vest immediately.
• Shorter schedules for a founder who joined late or contributed an existing product.
• Milestone vesting tied to events, such as a product launch. This works less well, because people argue about whether a milestone was met.

What happens when a cofounder leaves

The answer depends on what you signed. With vesting in place, the company can usually buy back the departing founder’s unvested shares at the agreed price, and the founder keeps their vested shares. Without vesting, a founder who leaves after six months generally keeps every share they were issued, and the founders who stay carry the company with a large passive shareholder on the cap table.

Many agreements also distinguish between how someone leaves:

• Good leaver (for example, death, disability or termination without cause): keeps vested shares, and sometimes gets a better buyback price.
• Bad leaver (for example, resigning early or termination for cause): may have even vested shares bought back at cost.

The definitions matter more than the labels. Write them so a neutral reader could apply them to a real departure.

Can the company legally buy the shares back?

Usually, but corporate law limits it. Under section 34 of the Canada Business Corporations Act, and the equivalent rules in sections 30 and 31 of Ontario’s Business Corporations Act, a corporation can’t pay to buy back its own shares if it would then be unable to pay its debts as they come due, or if its assets would fall below its liabilities and stated capital.

Because founder shares are usually bought back at a nominal price, this is rarely a problem in practice. Agreements often add a fallback: if the company can’t buy, the other shareholders can.

Where vesting terms are written down

Vesting terms usually sit in the shareholder agreement, or in a separate share restriction or repurchase agreement signed by each founder, and are approved by a directors’ resolution. If every shareholder signs, the agreement may also be a unanimous shareholder agreement under section 146 of the CBCA or section 108 of the OBCA, which changes who has power to make certain decisions.

A useful vesting agreement covers:

• the number of shares subject to vesting and the start date;
• the schedule and any cliff;
• what triggers a buyback, and the price;
• how long the company has to exercise the buyback;
• what happens on a sale of the company (acceleration, below);
• an IP assignment from each founder to the company.

Acceleration on a sale

Acceleration means some or all unvested shares vest early. Single-trigger acceleration vests shares on a sale of the company. Double-trigger acceleration needs two events: a sale and the founder losing their role within a set period afterwards. Buyers and investors tend to be more comfortable with double-trigger, because it keeps founders committed through a transition.

Why investors ask about vesting

Investors are backing a team. If a founder can walk away with a large stake after a few months, the company has less equity left to recruit a replacement, and the investor’s money is supporting someone who has left. That’s why investors often ask in due diligence whether founder shares vest, and sometimes ask founders to put vesting in place, or restart part of it, as a condition of a round.

Putting vesting in early, on your own terms, is usually easier than negotiating it under a term sheet. See getting investor-ready.

Vesting and IP go together

Vesting protects the equity; an IP assignment protects the product. Under section 13 of the Copyright Act, the author of a work is generally its first owner, and an assignment only works if it’s in writing and signed. Code a founder wrote before the company existed belongs to that founder until it’s assigned. A founder who leaves without signing one can take a real piece of the product with them. See who owns code a contractor writes and our who owns your code checklist.

Tax points to raise with an accountant

Founders’ shares are usually issued at a nominal price when the company is formed, because that’s when they’re worth least. Issuing shares later, after the company has value, can create tax questions. Founders who are US taxpayers may have separate US filing issues with shares subject to vesting, including whether to make a section 83(b) election, which the IRS requires within 30 days after the shares are transferred. Get Canadian and, where relevant, US tax advice before the shares are issued, not after.

What to do next

1. Agree the split and the schedule with your cofounders while everyone is still on good terms.
2. Put the vesting terms and an IP assignment in writing, approved by the board.
3. Keep the minute book and cap table showing who holds what, and which shares are still subject to buyback.
4. Revisit the terms before a financing, so investors see a clean answer.

We set up founder vesting and IP assignments and shareholder agreements at fixed fees, also available together in the founder pack on our fees page. Fees are in Canadian dollars and exclude HST; government filing fees and other disbursements are charged at cost. Our legal budget planner shows what a first year of legal work typically includes. For more on timing, see legal help for AI and SaaS startups, stage by stage.

This guide is general information about Ontario and Canadian law, not legal advice for your situation. To talk through your cofounder arrangements, book a free 15-minute consult.