Cap Table Management & Founder Agreements

Published: September 28, 2025 • Incorporation
Cap Table Management & Founder Agreements | Complete Guide to Equity & Vesting

Complete Guide to Equity Structure, Vesting Schedules & Acceleration Clauses

Master the fundamentals of founder equity with this comprehensive guide covering vesting schedules, reverse vesting, forward grants, and acceleration clauses. Learn industry standards and best practices used by successful startups.

📚 Why Cap Table Management Matters

Your cap table is the foundation of your startup's equity structure. Poor management can lead to founder disputes, investor complications, and even failed fundraising rounds. Understanding vesting schedules, reverse vesting, and acceleration clauses is critical for protecting both the company and its founders.

💡
Key Insight: 73% of failed startups cite founder disputes as a major factor. Proper equity structure with vesting schedules reduces this risk significantly by aligning incentives and protecting all parties.

🎯 What You'll Learn

📅 Vesting Schedules
  • 4-year vesting with 1-year cliff (industry standard)
  • Monthly vs quarterly vesting
  • Cliff mechanics and purpose
  • How to implement vesting correctly
🔄 Reverse vs Forward Grants
  • Understanding reverse vesting mechanics
  • Forward grant vs restricted stock
  • Tax implications (83(b) elections)
  • Which approach is right for you
⚡ Acceleration Clauses
  • Single-trigger vs double-trigger
  • When acceleration applies
  • Negotiating with investors
  • Common acceleration scenarios

📊 Cap Table Components

Component Description Typical % Vesting
Founder Equity Shares issued to company founders 70-100% at incorporation 4 yr / 1 yr cliff
Employee Option Pool Reserved for employee equity compensation 10-20% pre-funding 4 yr / 1 yr cliff
Advisor Equity Equity grants for advisors 0.25-1% per advisor 2 yr / 6 mo cliff
Investor Equity Preferred stock for investors 15-25% per round No vesting
⚠️
Common Mistake: Many founders skip vesting or use non-standard schedules to seem "founder friendly." This almost always backfires. VCs require standard vesting, and without it, you're vulnerable if a co-founder leaves early.

📅 Vesting Schedules Explained

Vesting schedules ensure founders and employees earn their equity over time. This protects the company and other stakeholders from someone leaving early but keeping their full equity stake.

⏱️ Standard 4-Year Vesting with 1-Year Cliff

✅
Industry Standard: The 4-year vesting schedule with a 1-year cliff is the most common structure. Here's how it works:
  • Year 1 (Cliff): No equity vests for the first 12 months. If founder leaves before 1 year, they get 0%
  • After Cliff: 25% of total equity vests immediately after completing year 1
  • Years 2-4: Remaining 75% vests monthly or quarterly over the next 36 months
  • Full Vesting: 100% vested after completing 4 years

📊 Vesting Timeline Visualization

Equity Vesting Progress Over 4 Years
Month 0 (Start) 0% Vested
Month 12 (Cliff) 25% Vested
25%
Month 24 (Year 2) 50% Vested
50%
Month 36 (Year 3) 75% Vested
75%
Month 48 (Year 4) 100% Vested
100%

🧮 Interactive Vesting Calculator

💡 Calculate Your Vested Equity

📋 Alternative Vesting Schedules

Schedule Type Duration Cliff Frequency Use Case
Standard Founder 4 years 12 months Monthly Default for all founders
Employee Standard 4 years 12 months Monthly Full-time employees
Advisor 2 years 6 months Quarterly Company advisors
Executive 4 years 6-12 months Monthly C-level hires
Board Member 2-3 years 0-6 months Quarterly Independent directors
Consultant 1-2 years 0-3 months Milestone-based Project-based work
⭐ Best Practices for Vesting Schedules
  • Always use a cliff: Protects against early departures (12 months for founders, 6-12 for employees)
  • Monthly vesting preferred: More granular than quarterly, fairer to departing team members
  • Document everything: Use proper stock purchase agreements and vesting schedules
  • File 83(b) elections: Critical tax optimization - must file within 30 days of grant
  • Consider acceleration carefully: Don't give away too much leverage in acquisition scenarios
  • Be consistent: Use standard schedules unless there's a compelling reason to deviate

🔄 Reverse Vesting vs Forward Grants

Understanding the difference between reverse vesting and forward grants is critical for founders. Both achieve similar goals but have different mechanics, tax implications, and investor preferences.

🔍 Key Differences

🔄 Reverse Vesting Recommended

How it works:

Founders receive 100% of their shares immediately, but the company has the right to repurchase unvested shares at cost if the founder leaves.

✓ Advantages:

  • Immediate stock ownership (important for 83(b) election)
  • Founder is a shareholder from day one
  • Voting rights on unvested shares
  • Preferred by VCs and investors
  • Cleaner cap table mechanics

✗ Disadvantages:

  • Requires 83(b) election within 30 days
  • Tax liability if shares have value at grant
  • More complex documentation
⏩ Forward Grants Less Common

How it works:

Shares are granted over time according to the vesting schedule. No shares are issued until they vest.

✓ Advantages:

  • No 83(b) election needed
  • No immediate tax implications
  • Simpler to understand
  • Similar to stock options

✗ Disadvantages:

  • Not a shareholder until shares vest
  • No voting rights on unvested equity
  • Tax issues as shares vest if value increases
  • Investors strongly prefer reverse vesting
  • Complications with cap table management

📊 Side-by-Side Comparison

Feature Reverse Vesting Forward Grants
Initial Ownership 100% of shares issued immediately 0% until vesting occurs
Voting Rights Yes, on all shares (vested & unvested) Only on vested shares
83(b) Election Required Yes, within 30 days of grant No (but tax on vest if FMV increased)
Tax at Grant Yes, on FMV (usually $0.001/share) No tax at grant
Tax at Vesting None (if 83(b) filed) Yes, on FMV at vesting date
Investor Preference Strongly preferred Often rejected
Cap Table Complexity Simpler (all shares issued) More complex (tracking future grants)
Departure Mechanics Company repurchases unvested shares Unvested shares simply don't issue

💰 Tax Implications: 83(b) Election

🚨
CRITICAL: If you use reverse vesting, you MUST file an 83(b) election with the IRS within 30 days of receiving your shares. Missing this deadline can result in massive tax penalties as your shares vest.
📖 Example: Why 83(b) Election Matters

Scenario: You receive 1,000,000 shares at $0.001/share ($1,000 total value)

✅ WITH 83(b) Election (Filed within 30 days):

  • Tax at grant: ~$0 (shares worth $0.001 each)
  • Tax as shares vest: $0 (already taxed at grant)
  • Tax at exit ($10M value): Capital gains on $10M - $1,000 = ~$2.4M tax (23.8% rate)
  • Total tax: ~$2.4M on $10M exit

❌ WITHOUT 83(b) Election (Forgot to file):

  • Tax at grant: $0
  • Tax as shares vest (Year 2): Company valued at $5M → $1.25M ordinary income tax on 25% vesting = ~$500K tax
  • Tax at exit ($10M value): Capital gains + ordinary income = ~$4.5M total tax
  • Total tax: ~$4.5M on $10M exit (nearly DOUBLE!)

Missing the 83(b) deadline can cost you millions. Always file within 30 days and keep proof of filing.

📝 How to Implement Reverse Vesting

Step 1: Restricted Stock Purchase Agreement
Founder purchases shares at par value (typically $0.001/share). Agreement includes repurchase rights allowing company to buy back unvested shares at cost if founder leaves.
Step 2: Execute Purchase & Issue Stock
Founder pays for shares (usually minimal amount). Company issues stock certificate showing 100% ownership subject to vesting.
Step 3: File 83(b) Election (Within 30 Days!)
File Form 83(b) with IRS within 30 days of stock grant. Send copy to company. Keep certified mail receipt as proof. This is CRITICAL and cannot be late.
Step 4: Track Vesting Schedule
Company tracks vesting on cap table. After 1-year cliff, 25% vests. Remaining vests monthly over 36 months. Update cap table software accordingly.
Step 5: Handle Departures
If founder leaves, company exercises repurchase right on unvested shares at original purchase price. Update cap table to reflect repurchased shares.
⭐ Best Practices: Reverse Vesting
  • Use reverse vesting, not forward grants: Industry standard and investor requirement
  • File 83(b) immediately: Set calendar reminder for day 1. Don't wait. Send certified mail.
  • Use standard par value: $0.0001 to $0.001 per share keeps tax minimal
  • Include in all founder agreements: No exceptions. Protects everyone.
  • Use cap table software: Carta, Pulley, or AngelList to track vesting automatically
  • Board approval required: Stock issuance needs board resolution and proper documentation

⚡ Acceleration Clauses

Acceleration clauses determine what happens to unvested equity when the company is acquired or a founder is terminated. Understanding single-trigger vs double-trigger acceleration is crucial for protecting founder interests while remaining attractive to acquirers.

🎯 Types of Acceleration

⚡ Single-Trigger Acceleration Risky

Definition: All unvested equity immediately vests upon a single event (usually acquisition/change of control).

✓ Advantages:

  • Maximum founder protection
  • Simple to understand and implement
  • Immediate liquidity on acquisition
  • Founder can walk away post-acquisition

✗ Disadvantages:

  • Makes company less attractive to acquirers
  • VCs will almost always reject this
  • Removes retention incentive post-acquisition
  • Can kill acquisition deals
  • Creates accounting/tax complications
Investor Perspective: VCs typically prohibit single-trigger acceleration because it makes the company harder to sell.
⚡⚡ Double-Trigger Acceleration Standard

Definition: Unvested equity accelerates only if TWO events occur: (1) acquisition/change of control AND (2) termination without cause or constructive termination within 12-18 months.

✓ Advantages:

  • Balances founder and acquirer interests
  • Acceptable to VCs and acquirers
  • Protects founders from bad faith termination
  • Preserves retention incentive if kept on
  • Won't block acquisition deals

✗ Disadvantages:

  • No acceleration if you keep your job
  • More complex to implement
  • Requires defining "cause" and "constructive termination"
  • Subject to negotiation with acquirer
Investor Perspective: This is the industry standard. VCs expect and accept double-trigger acceleration.

📊 Acceleration Comparison Matrix

Feature Single-Trigger Double-Trigger No Acceleration
Trigger Events Acquisition only Acquisition + Termination None
Founder Protection Maximum Moderate None
VC Acceptance Usually rejected Standard/accepted Preferred by VCs
Acquirer Acceptance Often deal-breaker Generally accepted Preferred
Retention Incentive None (vests immediately) Yes (only if terminated) Strong
Typical % Accelerated 100% of unvested 50-100% of unvested 0%
Best For Solo founders (rare) Most startups (standard) Founder unfriendly

💼 Common Acceleration Scenarios

📖 Scenario 1: Acquisition with Retention

Situation: Your company is acquired for $50M after 2 years. You have 20% equity with 50% still unvested. You're offered a job at the acquiring company.

With Single-Trigger Acceleration:

  • 100% of your equity (all 20%) vests immediately at acquisition
  • You receive $10M payout ($50M × 20%)
  • You can walk away or negotiate new equity package with acquirer
  • Acquirer loses retention leverage (you already got paid)

With Double-Trigger Acceleration:

  • Only your vested 10% pays out immediately = $5M
  • Remaining 10% stays unvested, continues vesting schedule
  • If you stay and aren't terminated: earn remaining $5M over 2 years
  • If terminated without cause within 12 months: acceleration triggers, you get the $5M
  • Acquirer happy (retention incentive). You're protected (can't be terminated and lose unvested)

Outcome: Double-trigger is better for both parties. You get protection, acquirer gets retention.

📖 Scenario 2: Hostile Post-Acquisition Termination

Situation: Company acquired. New management wants to replace you 6 months later to avoid paying out your unvested equity (worth $3M).

Without Acceleration:

  • You're terminated "without cause"
  • You lose all $3M in unvested equity
  • Acquirer saved $3M by firing you
  • Result: You get nothing despite helping build the company

With Double-Trigger Acceleration:

  • Termination without cause triggers acceleration
  • Your unvested $3M immediately vests
  • Acquirer must pay, discouraging bad faith termination
  • Result: You're protected from being pushed out

Key Protection: Double-trigger prevents acquirers from terminating founders to avoid paying unvested equity.

⚖️ Acceleration Percentages

💡
Partial vs Full Acceleration: You don't have to accelerate 100% on double-trigger. Common structures include:
Acceleration Type % Accelerated Typical Use VC Acceptance
Full Acceleration 100% of unvested Founders, key executives Negotiable
Partial Acceleration 50% of unvested Good compromise More acceptable
12-Month Acceleration 12 months worth Employees, advisors Readily accepted
6-Month Acceleration 6 months worth Junior employees Preferred
Cliff Acceleration Through next cliff only Alternative approach Acceptable

📝 Key Terms to Define

🔍 "Cause" for Termination

Must be specifically defined. Typically includes:

  • Conviction of felony or crime of moral turpitude
  • Fraud, embezzlement, or theft from company
  • Willful misconduct or gross negligence
  • Breach of fiduciary duties
  • Material breach of employment agreement
  • Failure to perform duties after written notice

Important: "Cause" should be narrow. Performance issues shouldn't count as "cause."

🔍 "Constructive Termination"

Triggering conditions (founder quits but gets acceleration):

  • Material reduction in salary (usually >10-20%)
  • Material reduction in role or responsibilities
  • Relocation >50 miles from current office
  • Material breach of employment agreement by company
  • Removal from board or officer position
  • Assignment of duties inconsistent with position

Protection: Prevents acquirer from making your job unbearable to force you to quit without triggering acceleration.

🧮 Interactive Acceleration Calculator

💡 Calculate Acceleration Payout
⭐ Best Practices: Acceleration Clauses
  • Use double-trigger, not single-trigger: Industry standard and VC requirement
  • Negotiate early: Add acceleration clauses at incorporation, not during fundraising
  • 100% acceleration for founders: 50-100% for key executives, less for employees
  • Define terms clearly: "Cause" and "constructive termination" must be specific
  • 12-18 month window: Acceleration window after acquisition (standard is 12 months)
  • Board approval: Get investor board members comfortable with acceleration terms early
  • Consider change in control definition: Asset sale, stock sale, or merger? Define all scenarios

✨ Best Practices & Common Mistakes

Learn from the mistakes of thousands of startups. These best practices will save you from costly errors and founder disputes.

✅ The Golden Rules

🎯 Always Use Vesting

Why: Without vesting, a co-founder who leaves after 1 month keeps 100% of their equity.

Even if you trust your co-founders completely, VCs will require vesting before investing. Start with vesting from day one.

Horror Story: Company with 3 equal founders (33% each). One quits after 2 months but keeps 33%. Now the 2 remaining founders own 33% each, and the departed founder owns 33% but does nothing. Company is unfundable.
📄 File 83(b) Election

Why: Missing the 30-day deadline can cost millions in taxes.

The 83(b) election allows you to pay tax on equity value NOW (when it's worth nothing) instead of when it vests (when it might be worth millions).

Horror Story: Founder forgot to file 83(b). Company exits for $20M. Founder owes $3M in taxes on vesting despite only receiving $1M in cash at exit. Result: bankruptcy.
📝 Document Everything

Why: Handshake deals and "we'll figure it out later" lead to lawsuits.

Use proper stock purchase agreements, vesting schedules, board resolutions, and cap table software from day one.

Horror Story: Two founders agreed to "50/50 split" verbally. One claimed they meant 50/50 of profits, the other thought it meant 50/50 equity. $200K legal battle ensued.
🔄 Use Reverse Vesting

Why: Forward grants create tax problems and VCs hate them.

Issue shares immediately with company repurchase rights. This is the industry standard and what investors expect.

Success Story: Company used reverse vesting from day one. VCs praised the clean cap table. Fundraising was smooth. Acquisition had no equity complications.
⚡ Double-Trigger Acceleration

Why: Balances founder protection with investor/acquirer acceptance.

Single-trigger kills acquisitions. No acceleration leaves founders vulnerable. Double-trigger is the compromise that works.

Success Story: Founder negotiated double-trigger acceleration. Acquired for $40M. New CEO tried to fire founder to avoid payout. Acceleration triggered. Founder got $4M. Protection worked.
💼 Use Cap Table Software

Why: Excel spreadsheets lead to errors that cost millions.

Use Carta, Pulley, AngelList, or similar. Automate vesting, 409A valuations, and compliance.

Warning: Excel errors in cap tables have caused fundraising delays, acquisition problems, and shareholder lawsuits. Don't be cheap here.

❌ Common Mistakes to Avoid

🚫
Critical Mistakes That Kill Startups:
Mistake Why It's Bad Fix
No vesting at all Co-founder quits early, keeps equity. Company unfundable. VCs won't invest. Implement 4yr vesting with 1yr cliff from day one
Missing 83(b) deadline Massive tax bill when shares vest. Can exceed value of shares. Potential bankruptcy. File within 30 days. Set calendar reminders. Send certified mail.
Using forward grants Tax complications, VC rejection, messy cap table, acquisition problems. Use reverse vesting (issue shares immediately with repurchase rights)
Single-trigger acceleration Makes company unattractive to acquirers. VCs prohibit it. Can kill acquisition. Use double-trigger (acquisition + termination)
Verbal equity agreements Leads to disputes, lawsuits, founder breakups. Can't prove terms. Document everything in proper stock purchase agreements
Wrong share class (common vs preferred) Tax complications, VC issues, 409A problems, IRS scrutiny. Founders get common stock. Investors get preferred. Use proper documentation.
No cliff period Founder vests monthly from day 1. Quits month 2 with 1/48th equity. Always use 12-month cliff (nothing vests until 12 months)
Unequal vesting schedules Creates resentment, unfairness, investor questions. Signals dysfunction. All founders get same vesting schedule (4yr/1yr cliff)
Not defining "cause" and "constructive termination" Disputes over whether acceleration triggers. Lawsuits over definitions. Clearly define terms in stock purchase agreement
Issuing equity without board approval Invalid issuance. Legal problems. Cap table complications. Shareholder lawsuits. Get board resolution for all equity grants

📋 Implementation Checklist

✅ Founder Equity Implementation Checklist

Before Incorporation:

  • Discuss equity split with all co-founders
  • Agree on vesting schedule (recommend 4yr/1yr cliff)
  • Discuss acceleration terms (recommend double-trigger)
  • Choose cap table software (Carta, Pulley, etc.)
  • Hire startup lawyer (don't DIY this)

At Incorporation:

  • File Delaware C-Corp (or your state)
  • Adopt bylaws and issue shares
  • Initial board resolution authorizing share issuance
  • Set par value (typically $0.0001/share)
  • Issue common stock to founders

Immediately After Issuance:

  • Execute Restricted Stock Purchase Agreements (with vesting)
  • Founders pay for shares (minimal amount at par value)
  • Issue stock certificates
  • File 83(b) elections within 30 days (certified mail!)
  • Keep copies of filed 83(b) forms with certified mail receipts

Ongoing Maintenance:

  • Update cap table monthly (track vesting)
  • Maintain stock ledger
  • Annual 409A valuation (required)
  • Board approval for all new equity grants
  • Document all equity changes
  • Keep organized records (critical for fundraising)

Before Fundraising:

  • Clean up cap table (fix any errors)
  • Ensure all 83(b) elections filed
  • Get 409A valuation (required by VCs)
  • Review and update vesting schedules
  • Prepare detailed cap table for investor due diligence
  • Have lawyer review all equity documentation

🎓 Learning Resources

📚 Essential Reading
  • Venture Deals by Brad Feld
    Comprehensive guide to venture capital and equity
  • Slicing Pie by Mike Moyer
    Dynamic equity splits for early-stage startups
  • The Founder's Dilemmas by Noam Wasserman
    Data-driven insights on equity and founder issues
  • Y Combinator Startup Library
    Free resources on equity and cap tables
🛠️ Recommended Tools
  • Carta
    Leading cap table management platform
  • Pulley
    Modern cap table software for startups
  • AngelList
    Cap table + fundraising platform
  • Clerky
    Automated legal documents for startups

💼 Real-World Scenarios

Learn from actual situations that founders face. These scenarios show how vesting, reverse vesting, and acceleration clauses work in practice.

📖 Scenario 1: The Early Departure

Background: Three co-founders start a company. They split equity 33/33/33 with 4-year vesting and 1-year cliff. After 8 months, one founder gets a great job offer and leaves.

❌ Without Vesting:

  • Departed founder keeps full 33% equity
  • Remaining founders each have 33% but do all the work
  • Company has 33% "dead equity" - major red flag for investors
  • Company becomes unfundable or must buy back shares at massive cost

✅ With Vesting (4yr / 1yr cliff):

  • Departed founder left at 8 months (before 1-year cliff)
  • Zero equity vested - company repurchases all 33% at cost (pennies)
  • Remaining 2 founders now own 50/50
  • Company has clean cap table and is fundable
  • Everyone protected from unfair outcome

Outcome: Vesting protected the company and remaining founders. Without vesting, this company would have failed or required expensive legal battles.

📖 Scenario 2: The Acquisition Trap

Background: Startup acquired for $30M after 2 years. Founder owns 30% (worth $9M). 50% is vested ($4.5M), 50% unvested ($4.5M). Acquirer offers founder a job.

Scenario A: No Acceleration

  • At acquisition: Founder gets $4.5M (vested portion only)
  • 6 months later: New CEO wants to replace founder to save money
  • Termination: Founder loses $4.5M in unvested equity
  • Result: Founder screwed out of half their value

Scenario B: Single-Trigger Acceleration

  • At acquisition: All equity accelerates, founder gets full $9M
  • Problem: Acquirer loses retention leverage
  • Deal impact: Acquirer reduces purchase price by $4.5M to offset acceleration
  • Result: Deal still works but at lower valuation, or deal falls apart entirely

Scenario C: Double-Trigger Acceleration ✅

  • At acquisition: Founder gets $4.5M (vested portion)
  • If stays employed: Earns remaining $4.5M over 2 years
  • If terminated without cause: Acceleration triggers, gets $4.5M immediately
  • Protection: Acquirer can't fire founder to avoid payout
  • Retention: Founder has incentive to stay if treated well
  • Result: Win-win, deal closes at full $30M valuation

Outcome: Double-trigger acceleration balances founder protection with acquirer interests. Both parties protected, deal closes successfully.

📖 Scenario 3: The Forgotten 83(b)

Background: Founder receives 2M shares at $0.001/share ($2,000 total). Uses reverse vesting but forgets to file 83(b) election. Company grows rapidly.

Timeline:

  • Year 0: Receives shares worth $2,000. Forgets to file 83(b).
  • Year 1 (cliff): 25% vests. Company now valued at $10M. 25% of founder's shares = $625K value.
  • Tax consequence: $625K taxed as ordinary income = ~$250K tax bill
  • Problem: Shares are illiquid. Founder has no cash to pay $250K tax.
  • Years 2-4: Each month, more shares vest and are taxed at current valuation
  • Year 4: Company exits for $50M. Founder's 20% = $10M

Total Tax Without 83(b):

  • Ordinary income tax on vesting: ~$3M over 4 years
  • Capital gains tax on sale: ~$1.7M
  • Total tax: ~$4.7M on $10M exit
  • After-tax proceeds: ~$5.3M

Total Tax With 83(b) Filed:

  • Tax at grant: ~$0 (shares worth $2,000)
  • Tax as shares vest: $0 (already taxed at grant)
  • Capital gains tax on sale: ~$2.4M
  • Total tax: ~$2.4M on $10M exit
  • After-tax proceeds: ~$7.6M

Cost of forgetting 83(b): $2.3 MILLION in extra taxes! ($7.6M - $5.3M)

Additional Problem: The founder owes $250K+ in taxes each year as shares vest, but has no liquidity to pay. May be forced to sell personal assets or take loans to pay IRS.

📖 Scenario 4: The Hostile Takeover

Background: Startup acquired by larger competitor. Founder has double-trigger acceleration (100% of unvested). Acquiring CEO plans to "clean house" post-acquisition.

Situation:

  • Acquisition closes at $40M valuation
  • Founder owns 25% ($10M total value)
  • 50% vested ($5M), 50% unvested ($5M)
  • Founder receives $5M cash at close
  • Remaining $5M tied to continued vesting over 2 years
  • New CEO offers founder "advisory role" with 70% pay cut and no real responsibilities

How Double-Trigger Protects Founder:

  • Option 1: Founder rejects "advisory role" - this counts as constructive termination (material reduction in role/compensation)
  • Option 2: Founder accepts role, then is terminated 3 months later "for budget reasons"
  • Either way: Double-trigger activates (acquisition + termination)
  • Acceleration: All $5M in unvested equity immediately vests
  • Payout: Founder receives full $10M total ($5M initial + $5M accelerated)
  • Protection worked: Acquirer couldn't force founder out to avoid payout

Without Acceleration:

  • Founder forced to accept "advisory role" to protect unvested equity
  • Works miserable job for 2 years earning remaining $5M
  • OR rejects role and loses $5M in unvested equity
  • Acquirer has all the leverage

Outcome: Acceleration clause protected founder from hostile post-acquisition treatment. Acquirer knew they couldn't push founder out without triggering $5M payout, so they negotiated fair terms instead.

📖 Scenario 5: The VC Term Sheet Surprise

Background: Startup raising Series A. Three founders split equity 40/30/30. No vesting in place. "We're all committed long-term, we don't need vesting."

What Happened:

  • Lead investor gives term sheet for $5M at $20M valuation
  • During due diligence, investor discovers no vesting
  • Investor's response: "We require all founder equity to have vesting. Either implement it or we walk."
  • Founders now must implement vesting retroactively - very messy

The Complications:

  • Retroactive vesting: Shares already issued without vesting. Must buy back and re-issue.
  • Tax problems: Buyback and re-issuance creates taxable event
  • 83(b) deadline missed: Can't file 83(b) on retroactive vesting
  • Valuation increased: Company now worth $20M. Shares being re-issued at higher FMV = immediate tax
  • 409A valuation: Required for re-issuance, costs $10K+
  • Founder resistance: One founder refuses to accept vesting, negotiations break down
  • Deal delayed: 3-month delay while sorting out vesting and taxes
  • Deal falls apart: Lead investor loses patience, backs out

What They Should Have Done:

  • Implement vesting at incorporation when shares are worth pennies
  • File 83(b) elections within 30 days
  • Clean cap table from day one
  • VC due diligence: no issues
  • Deal closes smoothly in 6 weeks

Cost of delaying vesting: Lost $5M Series A round. Company ran out of money 4 months later. Shut down.

Lesson: "We'll add vesting later when we need it" is a startup killer. Implement vesting at incorporation, period.

🎯 Key Takeaways from Real Scenarios

💡
What These Scenarios Teach Us:
  • Vesting is not optional: It protects everyone and is required by investors
  • 83(b) is critical: Missing the 30-day deadline can cost millions
  • Double-trigger works: Balances founder protection with investor/acquirer interests
  • Do it right from day one: Retroactive fixes are expensive, complex, and sometimes impossible
  • Document everything: Verbal agreements and "we'll figure it out later" lead to disaster
  • Use professionals: Startup lawyers and cap table software are worth every penny

Need Help Implementing Your Cap Table & Founder Agreements?

I can help you set up proper vesting schedules, founder stock purchase agreements, 83(b) elections, and acceleration clauses. Get your equity structure right from the start.

Contact: owner@terms.law
Attorney: Sergei Tokmakov, Esq.
Services: Cap Table Setup, Founder Agreements, Vesting Schedules, 83(b) Filings