Startup equity vesting explained: cliffs, schedules and leavers

Vesting is a contract mechanism under which shares or options are earned over time, rather than owned outright from day one. If a founder or employee leaves before their equity has fully vested, the company can usually buy back or cancel the unvested part.

Vesting protects the people who stay. Without it, a co-founder who leaves after a few months could keep a large stake in a company that others go on to build for years. Investors check founder vesting in due diligence for exactly this reason.

In the most common structure, which Y Combinator describes as a typical setup, shares vest over four years with a one-year cliff. The cliff is the first year: if you leave before it ends, nothing has vested.

• Before 12 months: 0% vested.
• At 12 months: 25% vests at once.
• After that: 1/48 of the total vests each month.
• At 48 months: 100% vested.

Here is a worked example for a founder holding 30% of the company on a four-year schedule with a one-year cliff:

• Month 11: 0% of the company vested.
• Month 12: 7.5% vested (a quarter of 30%).
• Month 24: 15% vested.
• Month 36: 22.5% vested.
• Month 48: the full 30% vested.

What happens to a leaver's shares depends on the agreement, and many agreements distinguish between good and bad leavers. The definitions are contract terms, not law, so they must be written precisely.

• Good leaver: leaves for reasons the agreement treats as legitimate, such as illness or termination without cause. Usually keeps the vested part.
• Bad leaver: leaves in circumstances the agreement defines as a breach, such as joining a competitor or serious misconduct. The agreement may let the company buy back even vested shares, often at a low price.
• Avoid vague definitions such as "any reason the board decides". Both sides should know in advance which category applies.

Acceleration means some or all unvested equity vests early when a defined event happens, usually a sale of the company. With single-trigger acceleration, the sale alone triggers it. With double-trigger acceleration, it takes the sale plus a second event, typically termination of the founder or employee after the sale.

Acquirers often want key people to stay after a deal, so acceleration terms are negotiated. Discuss them with your lawyer when you sign, not when an offer arrives.

Employee options usually vest on a schedule similar to founders' shares. In Israel, their tax treatment is set mainly by Section 102 of the Income Tax Ordinance, which allows options and shares to be allocated to employees through a trustee approved by the tax assessing officer.

Under the trustee route, the employee is not taxed when the options are granted. Tax is due when the shares are sold by the trustee or transferred from the trustee to the employee. The company chooses a track and notifies the tax assessing officer when it asks for approval of the plan, at least 30 days before the allocation.

On the capital gains track, the shares must stay with the trustee until 24 months have passed from allocation and deposit with the trustee. If they do, the benefit is taxed as a capital gain at 25%. If they are released earlier, the benefit is taxed as employment income. On the employment income track, the trustee period is 12 months.

Note that the trustee route does not apply to an employee who is a controlling shareholder at or following the allocation, so founders who control the company generally fall outside it. Get tax advice before you set up an option plan.

No. Investors who buy shares for cash receive them outright, because they have already paid in full. Vesting applies to people who receive equity in exchange for future work, such as founders, employees, advisors and service providers who are paid partly in equity.

When new investors come in, they sometimes ask founders to restart or extend vesting, especially if the founders are already largely vested. That is a negotiation point, so understand what you are agreeing to before you sign the term sheet.

An 83(b) election is a US tax filing that matters for founders who are US taxpayers and receive shares subject to vesting, typically in a US company. It lets them include the value of the shares in income when the shares are transferred, rather than as they vest.

The deadline is strict. Under US Treasury regulations, the election must be filed no later than 30 days after the date the shares were transferred. Check with a US tax adviser whether it applies to you.

WeCcelerate is a Venture Builder in Israel since 2018, active in Tel Aviv and Jerusalem and recognized by the Israel Innovation Authority. We help founders understand founder agreements, vesting and cap table structure before they sign, working alongside the founders' own lawyers and accountants. Our MedTech track with Leumit Health Services adds clinical expertise, regulatory guidance, data access and pilot opportunities.