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Investment & Equity
The schedule by which founders or employees earn their equity over time, typically measured in years of continued service. The standard structure in Indian startups is a 4-year vesting schedule with a 1-year cliff: if someone leaves before the first anniversary, they get zero equity; after the cliff, they have earned 25% of their grant, with the remaining 75% vesting monthly or quarterly over the next three years. Vesting protects the company from granting equity to someone who leaves early and aligns long-term incentives. Founders' shares are also typically subject to vesting, with reverse vesting arrangements that allow the company to buy back unvested shares if a founder departs.
Vesting is the mechanism by which founders and employees earn their equity over time through continued service to the company. Rather than receiving all their shares upfront, equity recipients earn them gradually according to a vesting schedule. The standard structure in Indian startups — and across the global startup ecosystem — is a four-year vesting schedule with a one-year cliff. The cliff means that if a founder or employee leaves before completing one full year of service, they forfeit all unvested equity — they receive nothing. At the one-year mark, they "cliff vest" 25% of their grant. The remaining 75% vests in equal monthly or quarterly instalments over the following three years. Vesting protects the company from granting significant equity to someone who leaves early and does not contribute long-term value. Founders' shares are also typically subject to vesting, with the company retaining the right to buy back unvested shares (at cost) if a founder departs before the end of their vesting schedule. Reverse vesting arrangements are common for founders who have already spent time building the company before incorporation — the company issues all shares upfront but the founders agree to a vesting schedule for any shares that would otherwise be fully vested.
1. Establish vesting schedules at incorporation — all co-founders should have the same vesting terms unless there is a clear reason for differentiation. 2. Use a standard 4-year schedule with a 1-year cliff for both founders and employees. 3. Include acceleration clauses for change of control (single-trigger or double-trigger) to protect employees if the company is acquired. 4. Document vesting terms in the shareholders' agreement and ESOP scheme. 5. For later hires, consider accelerated vesting for key executives (e.g., 3-year schedule with 6-month cliff). 6. Use a cap table management platform to track vesting status automatically.
Two co-founders each receive 50,000 shares, vesting over 4 years with a 1-year cliff. After 8 months, Co-founder A decides to leave due to personal reasons. Because they have not passed the 12-month cliff, they forfeit all 50,000 shares — which return to the company's unallocated pool. Co-founder B continues and at 12 months vests 12,500 shares (25%). Over the next three years, Co-founder B vests the remaining 37,500 shares monthly. At the end of four years, Co-founder B owns all 50,000 vested shares plus the unallocated shares from Co-founder A (which may be granted to new hires or returned to the pool).
Vesting is an essential protection mechanism that ensures equity is earned through contribution, not just granted at the start. Every founder should have a vesting schedule from day one — it protects the company, aligns incentives, and prevents painful cap table problems if a co-founder leaves early.