Guide
Founder Vesting Schedules (Australia)
How 4-year / 1-year cliff vesting actually works in Australia — mechanics, tax, good vs bad leaver, and the drafting mistakes that hurt at raise time.
Founder vesting is the single most valuable clause in an Australian shareholders' agreement. It answers one question: what happens to a co-founder's equity if they leave? Without it, the answer is "they keep all of it" — and you get to run the company (and raise money) with a dead-weight shareholder on your cap table forever.
The Standard: 4 Years, 1-Year Cliff
Almost every Australian venture-backed startup uses the same shape:
- 4 years total vesting period
- 1-year cliff — nothing vests until month 12
- On the cliff, 25% vests in one lump
- Remaining 75% vests monthly (1/48th of total per month) over the next 36 months
Result: leave in month 11 → 0% vested. Leave in month 13 → 27% vested. Leave in month 48 → 100% vested.
How It Actually Works: Reverse Vesting
In the US, "vesting" usually means you do not own shares until they vest. In Australia — for tax and cap table reasons — we use reverse vesting:
- At incorporation, the founder receives 100% of their shares
- The company has a contractual right to buy back the unvested portion at a nominal price ($1 or par value) if the founder leaves
- As time passes, the "buy-back-able" portion shrinks — this is what "vesting" means in practice
You show up on the cap table as owning your full stake from day one. The buy-back right lives in the shareholders' agreement.
Good Leaver vs Bad Leaver
What triggers the buy-back matters. Most Australian shareholders' agreements distinguish:
| Departure reason | Classification | Company buys back at |
|---|---|---|
| Terminated for cause / fraud | Bad leaver | $1 nominal — even for vested shares |
| Resigns before cliff | Bad leaver | $1 nominal on all unvested |
| Resigns after cliff | Grey area — usually good leaver on vested | $1 on unvested; fair value on vested |
| Death, permanent disability | Good leaver | Fair value on all shares |
| Removed without cause | Good leaver | Fair value on vested; often acceleration |
Acceleration
Two types you will see in Australian term sheets:
- Single trigger — vesting accelerates 100% on a change of control (i.e. the company is sold). Investors resist this; acquirers hate it.
- Double trigger — vesting accelerates only if (a) the company is sold AND (b) the founder is terminated without cause within a set period after the sale (usually 12 months). This is the market-standard compromise.
Vesting the Founder Who Started Earlier
If one founder has been working on the idea for 12 months before the other joins, they usually get credit — a portion vests immediately at signing (e.g. 25%), and the remaining 75% vests over 4 years. Negotiate this at day one, not at raise time.
What Investors Will Insist On
By the time you take institutional money, expect the term sheet to include:
- Full 4-year vesting reset on the raise (yes — even if you've been at it for 3 years)
- 1-year cliff on the reset
- Double-trigger acceleration only
- Bad leaver forfeiture at nominal value
The single best way to reduce this pain later is to already have market-standard vesting in place. Investors will rarely reset a schedule that already looks reasonable.
Drafting Traps
- Missing tax advice. Reverse vesting has to be structured correctly to avoid ongoing income tax as shares vest. Get a tax lawyer or accountant to review.
- No buy-back mechanism. A "vesting" clause with no company right to buy back unvested shares does nothing.
- Ambiguous good/bad leaver definitions. "Cause" needs to be defined precisely — otherwise every departure ends in litigation.
- Founder controls the board. If the founder is the sole director, they can vote against their own buy-back. Add an independent director or explicit self-exclusion.
Frequently Asked Questions
Do Australian startups actually need founder vesting?
If you have co-founders, yes. Without vesting, a co-founder who quits in month 4 walks away with their full equity stake — often 25–50% of the company. Every serious investor requires vesting before they will invest, so you will end up doing it eventually. Doing it at day one is 10x easier.
Does vesting mean I do not own my shares yet?
The opposite. In Australian founder vesting, you own 100% of your shares from day one, but the company has a contractual right to buy back the 'unvested' portion at a nominal price if you leave. This is called reverse vesting.
What is a cliff?
A cliff is a minimum period you must stay before any shares vest. Standard is 12 months. If you leave before month 12, the company can buy back all your shares. On the 12-month mark, 25% vests in one go, then the remaining 75% vests monthly over the next 36 months.
Is founder vesting taxed in Australia?
If structured correctly as reverse vesting on shares already owned, there is no ongoing tax event as shares vest — you already own them for CGT purposes. This is a key advantage over ESOP options, which have their own tax rules. Always get tax advice before signing.
Next Step
Founder vesting lives inside your shareholders' agreement. See our fixed-fee startup packages or book a 15-minute call to talk through your founder terms.
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