Founder agreements, vesting and leaver provisions decide what happens when a founder departs. Diligence confirms they exist, are signed and would work as intended.
10 min read · Level 3
I think founders should be grateful when an investor insists on vesting, because it protects them from each other far more than it protects the investor. Almost every founding team believes it will stay together, and a meaningful share of them are wrong.
Founders usually receive shares at the start. Without vesting, a founder who leaves early keeps all of them.
Vesting makes shares earned over time. A common arrangement is four years with a one-year cliff: nothing vests in the first year, then 25% vests at the cliff and the remainder monthly.
Leaver provisions decide what happens to shares when a founder leaves, often distinguishing:
Good leaver (for example, illness) may keep vested shares at fair value Bad leaver (for example, gross misconduct) may have to sell shares back at a low price
Three founders split a company 40% / 30% / 30%. One of the 30% founders leaves after eight months.
No vesting: keeps 30% Four-year vesting, one-year cliff: leaves before the cliff, keeps 0% of those shares Four-year vesting, no cliff: 8 / 48 of 30% = 5%
The remaining founders then work for years while a departed founder holds a large share - a problem future investors notice immediately.
Because dead equity held by departed founders reduces the incentive for those still building the company, complicates future rounds and can give an inactive person significant voting power.
It also tests how seriously founders have thought about their relationship; co-founder departures are common.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: UK Companies House; U.S. SEC - Investor.gov; UK GOV.UK - Running a limited company
Diligence reads the documents.
Founder agreement exists yes Vesting schedule four years, one-year cliff Signed by all founders two of three Leaver provisions defined but conflict with the company constitution
The unsigned agreement and the conflict mean the protections may not be enforceable. The investor asks for the agreement to be signed by all founders and the constitution amended before closing.
Accepting a statement that founders are vesting without reading the signed documents and checking they align with the company's constitution.
Confirm every founder has signed.
Note schedule, cliff, acceleration and vesting to date.
Understand good and bad leaver treatment and price.
Confirm the terms align with the constitution and shareholder agreements.
During diligence on any company with more than one founder, or where founders hold large unvested stakes.
Do not assume the same terms are standard or enforceable in every jurisdiction; take local legal advice.
Research on founding teams, including work by Noam Wasserman published in The Founder's Dilemmas, has documented that co-founder conflict and departure are common in startups, and that equity arrangements made early often fail to anticipate them.
Vesting and leaver terms exist because co-founder departures are normal, not exceptional.
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