What is vesting, and why does it matter to founders?

Two founders split a company fifty-fifty. Six months later one of them leaves, still holding half the shares. The founder who stays builds the company for years while half the value belongs to someone who no longer works there. Vesting is the mechanism used to prevent this.

How vesting works

Vesting means shares are earned gradually over a set period. A common structure in the startup ecosystem is four years with a one-year “cliff”: a founder who leaves before the first year earns nothing; a quarter of the shares vest at the end of year one, and the rest vest monthly or quarterly. These periods are a customary starting point, not a rule, and they can be negotiated.

Reverse vesting

Founders usually acquire their shares when the company is formed. For that reason founders are often subject to “reverse vesting”: they hold the shares from the start, but if a founder leaves early, the other shareholders have a right to buy back the unvested portion. In practice this right is frequently set out as a call option in the founders’ agreement or the shareholders’ agreement.

The structure depends on the type of company. In a Turkish limited company (limited şirket), a share transfer and any transaction creating an obligation to transfer must be in writing with notarized signatures (Turkish Commercial Code, Art. 595). A call option set up without this form may be invalid. A buy-back by the company itself is subject to statutory limits in both joint stock and limited companies (Art. 379 and Art. 612).

Good leaver, bad leaver

The reason for leaving changes the outcome. Agreements typically define two cases:

• Good leaver: a founder who leaves for a reason beyond their control, such as ill health, or by mutual agreement. They usually keep their vested shares.
• Bad leaver: a founder who seriously breaches their obligations or violates a non-compete. The buy-back may reach further and be at a lower price.

How these definitions are drafted will matter a great deal if a dispute ever arises.

Acceleration

What happens to unvested shares if the company is sold? Acceleration clauses deal with this. With a “single trigger”, the sale alone is enough. With a “double trigger”, a second condition is required, such as the founder’s role being terminated after the sale.

Why agree it at the start

It is far easier to discuss vesting while everything is going well than after a founder has left. Investors also generally expect founder shares to be subject to vesting before they invest. Writing the rules down at the beginning protects the founders from one another, and protects the company.