Three founders start out in equal shares. After eight months one leaves because the pressure is too much, and keeps a third of the company. The two who remain build the business over years, and the departed founder profits in full at exit. This is called dead equity, it is a knock-out criterion for investors, and a single provision prevents it: vesting.
How vesting works
Vesting means a shareholder earns his shares over time. Formally he holds them from the start; economically he has to work for them. If he leaves early he must transfer back the unvested portion, usually against nominal value or a graduated fair value. This is not recorded in the commercial register but in the shareholders' agreement.
The market standard is four years with a twelve-month cliff. The cliff means anyone leaving in year one earns nothing; whoever passes it receives a quarter at once and then vests monthly or quarterly. The structure comes from venture capital but is now equally common in mid-market shareholdings with several active partners.
Good leaver, bad leaver and the grey zone
Fairness depends on how departure is treated. A good leaver goes for reasons outside his control, such as illness, death or dismissal without cause. He keeps the vested shares and receives fair value for the rest. A bad leaver resigns without good reason or is removed for cause, and typically returns all shares at nominal value.
Between these poles lies the real negotiation. A third category is increasingly common, the early leaver, who did nothing wrong but leaves early and accepts a discount. What matters is that bad-leaver cases are defined narrowly and objectively. A clause treating every resignation as a bad-leaver event is legally vulnerable in Germany because it comes close to an inadmissible restriction on termination.
Vesting and exit: acceleration
A special case arises on a sale. If a founder sells after three of four years, a quarter of his shares would still be unvested. Acceleration clauses address this. Under a single trigger, vesting falls away entirely on a change of control. Under a double trigger it only does so if a second event occurs, typically termination of the founder by the acquirer within a defined period.
Buyers prefer the double trigger because it keeps founders in the business; founders prefer the single trigger. In practice a double trigger with partial acceleration usually prevails. Settle this long before a process, because nobody wants to negotiate internally during a live sale. How this interacts with employee equity is covered in our article on ESOP and employee participation at exit.
Why vesting belongs before the funding round
Anyone waiting for the first institutional round negotiates vesting not among founders but against an investor. That investor will demand vesting restarting at the round, crediting past years only partially. Setting the rules early lets you recognise prior contribution and enter negotiations with a clean structure.
This matters all the more because vesting is only one component of a robust cap table. Shareholdings, transfer restrictions, co-sale rights and the option pool belong in the same document and must be free of contradictions, as described in keeping a clean cap table and regularly the first checkpoint in startup financing.
FAQ
Does vesting also apply to a founder who has been on board for years? As a rule yes, but with credit for time served. It is market practice to treat past years as fully or partly vested and apply vesting only to the remainder.
What happens to returned shares? They are either redeemed by the company, distributed among the remaining shareholders or moved into the option pool for future employees. The use should be agreed in advance.
Does a mid-market company without investors need vesting? As soon as more than one active shareholder is involved and shares are meant to be tied to contribution, yes. Without a rule, the stake remains even when the work stops.