Founder vesting and 83(b)

Founders usually receive their shares at formation for a nominal price. Investors, and co-founders, want those shares to be earned over time, so that a founder who leaves early does not keep a large stake for little work. The mechanism in the U.S. is restricted stock subject to a repurchase right: the company can buy back unvested shares at the original price if the founder leaves. Vesting can be set up at formation or added when investors arrive.

The usual schedule

The most common schedule in U.S. startups is four years with a one-year cliff: nothing vests in the first year; on the first anniversary, a quarter vests; the rest vests monthly over the next three years. Founders who have already worked on the company for a while often negotiate credit for that time, so part of their stock starts vested.

Acceleration

• Single-trigger: some or all unvested shares vest on a sale of the company. Investors dislike it because an acquirer then has to re-incentivize the team.
• Double-trigger: unvested shares accelerate only if there is a sale and the founder is terminated without cause (or resigns for good reason) within a period after it. The more common compromise.

The 83(b) election: a 30-day deadline

Under U.S. tax law, stock that is subject to vesting is normally taxed as it vests, on its value at that time, which can be far higher than what the founder paid. Section 83(b) of the Internal Revenue Code lets the holder elect instead to be taxed when the stock is received, on the difference between its value then and the price paid. For founders buying shares at formation at fair value, that difference is usually zero.

The same applies whenever vesting is added to stock a founder already holds, for example when investors require vesting at a priced round (whether a new election is needed depends on how the restriction is structured; ask a tax adviser). Keep proof of mailing and a copy of the election: investors check for it in due diligence.

What investors usually ask for

• Vesting on founder shares if none exists, often with credit for time served.
• A repurchase right at cost for unvested shares on departure.
• No single-trigger acceleration; double-trigger is often acceptable.
• Signed IP assignment and confidentiality agreements from every founder.
• Evidence of timely 83(b) elections.

Between co-founders

Vesting is also the co-founders' protection against each other. If one founder leaves after six months without vesting, they keep their full stake while the others build the company. Agree vesting, and what happens on departure, before outside money arrives. Outside the U.S., the mechanics differ (for example, "leaver" provisions in UK articles of association), and so does the tax treatment.

Sources

1. Form 15620, Section 83(b) Election, and its instructions (Rev. 4-2025), Internal Revenue Service. Public domain (U.S. federal government work).
2. Model Legal Documents (term sheet, certificate of incorporation, investors' rights, voting and ROFR/co-sale agreements), National Venture Capital Association. Cited for structure; not reproduced.