Vesting

Vesting is the mechanism by which ownership of equity or the right to exercise options is earned progressively over time or upon the achievement of defined milestones, rather than transferred all at once on day one. It is the primary tool used by startups to align the long-term commitment of founders, employees, and key advisers with the company's value creation journey.

The most common structure in Indian startups is time-based vesting over four years with a one-year cliff: no equity vests in the first twelve months; upon reaching the one-year anniversary, 25% vests in a single tranche (the cliff); the remaining 75% then vests monthly or quarterly over the subsequent three years. This structure means someone who leaves in month eleven receives nothing, while someone who reaches year one has earned a meaningful stake that continues to grow.

Founder vesting — sometimes called reverse vesting or founder vesting — is increasingly insisted upon by institutional investors. Founders' shares are nominally issued in full but subject to a buyback right at nominal cost if the founder departs early. This protects co-founders and investors from a scenario where one founder leaves after six months but retains 25–50% of the company. Typical founder vesting runs over three to four years with a shorter or no cliff.

Acceleration clauses can trigger faster vesting: single trigger acceleration vests all remaining equity upon an acquisition event; double trigger requires both an acquisition AND the employee being terminated without cause before acceleration applies. Double-trigger is standard in India's VC-backed ecosystem as it avoids automatically paying out departing employees simply because the company sold.

For ESOP participants, vested options must be exercised within a defined window — often 90 days after leaving employment — or they lapse, creating a cash or tax burden that founders should be aware of when designing ESOP schemes.