Vesting Schedule

Vesting is the process by which a founder, co-founder, or employee earns their shares or options over time. A vesting schedule defines when those shares or options become permanently theirs, independent of continued employment. The purpose: protect the company and co-founders from a situation where someone exits early but retains a large equity stake that was meant to reward long-term contribution.

Who it applies to

• Co-founders — through investor-imposed reverse vesting clauses in shareholder agreements
• Employees receiving ESOPs — governed by the ESOP plan and individual grant letters
• Directors and advisors receiving option grants — governed by grant letters and the ESOP plan

Vesting does not apply to cash salary and does not automatically apply to founder shares at incorporation — it is imposed contractually.

How vesting works

The standard structure for Indian VC-backed startups:

Cliff: Nothing vests during the cliff period. If someone leaves before the 1-year mark, they leave with zero vested equity. After the cliff, a lump sum (typically 25%) vests at once.

Post-cliff: The remaining 75% vests in equal monthly instalments over 36 months — approximately 2.08% per month.

Founder reverse vesting

Investors typically impose reverse vesting on founders at Series A:

• The founders' existing shares are placed under a fresh vesting schedule from the date of the investment
• If a founder exits before the schedule completes, the company (or investor-designated entity) has the right to repurchase unvested shares at face value — usually ₹10 per share, regardless of current FMV
• The repurchase right is the enforcement mechanism — it is a right, not an obligation; investors choose whether to exercise it
• This is a shareholder agreement clause, not an ESOP grant

For founders who have been at the company several years before Series A, investors sometimes credit prior service, shortening the remaining vesting period. This is negotiable.

What most founders miss

Vesting and exercise are different steps for ESOPs. Vesting means you have earned the right to buy shares at the exercise price. Exercise is the act of paying the exercise price and receiving actual shares. A fully vested employee still has to exercise — and pay the exercise price and the perquisite tax on the FMV gain — before they own shares.

Acceleration is rare in India. Double-trigger acceleration (vesting accelerates on an M&A exit if the founder is also terminated or their role is substantially changed) is standard in US startup agreements but not yet common in Indian term sheets. Founders who want protection in an acqui-hire scenario should negotiate this explicitly.

Unvested options are not compensation — they are a promise. If the company closes before options vest, those options are worth nothing. Employees who join specifically for the ESOP opportunity should understand the vesting cliff: a startup that shuts down in month 10 means zero vested options regardless of how much the employee contributed.

Leave-of-absence treatment varies by plan. Many ESOP plans specify that vesting pauses during unpaid leave beyond a threshold (e.g., 90 days). Plans that are silent on this typically continue vesting through leave. Founders should confirm the plan terms before offering leave to an employee with a large unvested grant.

See also

• ESOP — the option plan framework governing employee vesting
• Sweat Equity Shares — an alternative to options that transfers shares immediately at allotment, with no vesting schedule
• Section 79 — secondary transfers of vested founder shares can affect loss carryforward analysis