Educational only — not investment, legal or tax advice.

Few founders enjoy hearing that they must “earn” shares in a company they created. But founder vesting protects the company, including from your co-founders, and investors almost always ask for it. In the US it also comes with a tax deadline that is easy to miss and expensive to get wrong.

What vesting means

With vesting, your shares are subject to a schedule. If you leave before they have vested, the company can buy back the unvested portion, usually at the price you paid. A common schedule is four years with a one-year cliff: nothing vests in the first year, then 25% vests at the one-year mark, and the rest monthly over the following three years.

Why investors insist on it

If a co-founder leaves after six months with a large stake fully owned, the remaining team does all the work while the departed founder keeps the equity. Vesting prevents that, which is why investors (and smart co-founders) want it.

What to negotiate

1. Credit for time served. If you have been working on the company for a year, ask for that year to count as vested.
2. Acceleration on a sale. “Double-trigger” acceleration, common in founder agreements, vests some or all remaining shares if the company is sold and you are let go. Single-trigger (on sale alone) is rarer and investors often resist it.
3. Good leaver terms. What happens if you are removed without cause, or leave due to illness? Spell it out.

The 83(b) election (US)

When you receive shares that are subject to vesting, US tax law by default treats each portion as income when it vests, valued at what it is worth then. If the company has grown, that can mean a large tax bill on shares you can’t sell.

A Section 83(b) election tells the IRS you want to be taxed on the shares at the time you receive them instead. For founders buying shares at a very low price early on, the taxable amount at that point is often small or zero.

The deadline is strict. As Cooley GO puts it, the election is only effective if filed with the IRS within 30 days of acquiring the shares. There is no extension.

Checklist: 1. Ask your lawyer to prepare the election when the shares are issued. 2. Send it to the IRS within 30 days, by a method that gives you proof of delivery. 3. Keep a copy with the proof. Investors’ lawyers will ask for it in due diligence.

This is general information, not tax advice. The right choice depends on your circumstances and jurisdiction; talk to a tax adviser.

From the investor’s side of the table

In due diligence, founder vesting and the paperwork behind it are among the first things checked. A missing 83(b) election cannot be fixed later, and it can become an uncomfortable conversation right before a round closes.

The short version

Vesting protects you from co-founder risk. In the US, file your 83(b) within 30 days of getting your shares, and keep the proof.

Sources

• Cooley GO glossary: Section 83(b) election
• Cooley GO glossary: Vesting

Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.