Vesting Schemes Explained

Vesting is the mechanism by which equity is earned over time rather than awarded outright. It applies in two distinct contexts in a UK startup: to co-founder shares, where shares are issued immediately but the company holds a right to buy back any unvested portion if the founder leaves early; and to employee options, where the option itself vests before the holder can exercise it to receive shares. The mechanics and legal documents are different in each case, but the economic effect is the same. This guide covers both mechanisms.

What problem does vesting solve?

For co-founders: protecting the founding team and their investors

Not all founding teams stay intact. It's very common for one co-founder to leave in the first one to two years — because the reality of building a company doesn't match the initial vision, because personal circumstances change, or because the working relationship breaks down. This is not an edge case. It happens for between 25% and 50% of startups.

Without vesting, an early leaver walks away with their full allocation of founder equity. Consider a three-person team who split the company 40/35/25. If the 35% co-founder leaves after six months, they keep their 35%. The remaining founders now spend the next four years building a company while one of their early cap table entries contributes nothing — and collects more than a third of the exit proceeds.

This is called "dead equity" — equity held by someone who is no longer contributing, which dilutes the ownership of the people who stayed and makes the cap table look unattractive to investors. The problem is not that anyone acted in bad faith. People's circumstances change. Founding relationships break down. The problem is that a cap table designed on day one's assumptions doesn't automatically adjust to day-five-hundred's reality.

Vesting on co-founder shares is therefore primarily a fairness mechanism between the founders themselves. It says: you earn your equity by staying and building. Leave early, and you leave most of it behind. The investment community will require it — but the deeper reason to have it is to protect the co-founders who stay.

The commercial argument reinforces the fairness one: investors considering a funding round will look at the cap table and ask hard questions about any significant equity holder who is no longer active. A cap table with a meaningful percentage sitting with a departed founder who left eight months in is a red flag that will complicate or delay a fundraise.

For employees: aligning reward with contribution

Employee equity — typically delivered as options rather than shares — serves a different purpose. The primary goal is retention and alignment: giving people a financial stake in the outcomes they help create.

An early employee who joins before a company has found product-market fit takes real risk. They typically accept a lower salary in exchange for the possibility of a meaningful payout at exit. Vesting is the mechanism that makes that bet worthwhile if the company succeeds while ensuring that the benefit reflects actual contribution rather than just being present on the first day.

Why investors require it

Any serious investor — whether an angel writing a first cheque or a VC leading a Series A — will check whether vesting is in place before committing capital. The absence of vesting on co-founder shares is one of the most common early-stage due diligence red flags.

The investor's concern is straightforward: they are investing in the team. If a co-founder can leave at any point and take a large chunk of equity with them, the investor's money may be backing a diminished team from day one.

Founder re-vesting at Series A is a related pressure point that founders should understand before it appears in a term sheet. Institutional investors often require founders to "re-vest" a portion of their shares as a condition of investment. The founder often (but not always) keeps their existing vested equity, but a portion of what remains is put onto a new (longer) vesting schedule tied to the investment date. The investor's argument is that they're backing the founder's future contribution, not just their history. How much re-vesting is reasonable is a negotiation, and founders who have already been building for two or three years typically push back hard on large re-vest requirements.

The practical implication for early-stage companies: if vesting isn't in place from the start, retrofitting it is technically possible but creates avoidable complexity — typically involving a share buyback, a re-issuance, and potentially taxable events depending on timing and valuation. Doing it at incorporation costs nothing. Doing it two years later costs legal fees and tax analysis.

How a vesting schedule works

The mechanics of a vesting schedule are the same regardless of whether you're vesting options forward or applying reverse vesting to shares. There are three parameters: the total vesting period, the cliff period, and the vesting cadence.

The standard: four years, one-year cliff

The market standard for UK startups — adopted widely for both co-founder shares and employee options — is a four-year total vesting period with a one-year cliff, followed by monthly vesting thereafter.

In practice, this means:

• Months 0–11: nothing vests. The holder has been granted equity but has not yet earned any of it.

• Month 12 (the cliff): 25% of the total vests in one go. This is the "cliff vest."

• Months 13–48: the remaining 75% vests in equal monthly instalments — one forty-eighth of the total each month.

By the end of year four, 100% has vested and the schedule is complete.

Why four years? There is no statutory basis for it — it is a convention that has become the UK startup default because it is what investors recognise and expect, and because it broadly aligns with the period over which a founding team or early employee is likely to be most impactful.

Variants

A three-year total vesting period is used by some companies, particularly where a four-year horizon feels long relative to the company's stage or the nature of the role. This can be combined with either a six-month or one-year cliff. There is no strong market consensus on which combination is more common among companies using a three-year schedule, and the right answer depends on the specific context.

Immediate partial vesting is occasionally used for people who have been working with the company in an informal capacity before a formal equity scheme is put in place. A portion vests immediately on the grant date (reflecting prior contribution), with the remainder following a standard schedule.

Monthly vs quarterly: after the cliff, vesting can happen monthly (most common) or quarterly. Monthly is smoother and more precise; quarterly is slightly simpler to administer. The practical difference is small.

Acceleration

Acceleration provisions allow vesting to speed up on a defined event. The two common types are:

Single-trigger acceleration: all or a portion of unvested equity vests immediately on a single event — typically a sale or acquisition of the company. This means holders receive their full allocation at exit regardless of how far through the schedule they are.

Double-trigger acceleration: requires two simultaneous events — the acquisition AND the holder's role being materially changed or eliminated (effectively redundancy). Double-trigger is more investor-friendly than single-trigger because it doesn't create an incentive to exit quickly, and is more commonly accepted in UK term sheets.

Acceleration provisions can be contentious with acquirers, who inherit the acceleration cost. Founders should understand the trade-off between protecting themselves and making the company harder to sell. For this reason, vesting documents are sometimes drafted without automatic acceleration entitlements, but instead giving the board discretion to offer acceleration. The board may then use that discretion to tie acceleration to some earn-out period (e.g. remaining with the company for a 12 month post-acquisition transition).

Forward vesting of options vs. reverse vesting of shares

This is the most important distinction to understand in UK equity management. The schedule logic — cliff, then monthly instalments — is the same in both cases. But the legal mechanism that enforces the schedule is completely different depending on whether the holder receives options or shares.

Forward vesting — used for options

An option is a contractual right to buy shares at a fixed price (the exercise price) at some point in the future. At the point of grant:

• No shares are issued.

• The holder is not a shareholder.

• Nothing appears at Companies House.

As the option vests, the holder gains the right to exercise their vested portion — to pay the exercise price and receive actual shares. Unvested options cannot be exercised.

At exercise, new shares are allotted, the holder becomes a shareholder, and an SH01 must be filed at Companies House within one month.

Options are typically used for employees because of the tax efficiency of the EMI scheme: there is no income tax or National Insurance on grant or vest, and only capital gains tax on a qualifying disposal at exit. This makes options far more tax-efficient than issuing shares directly to an employee at a later stage when the company has grown in value.

Reverse vesting — used for shares

With reverse vesting, shares are issued immediately. The holder is a shareholder from day one — they can vote and receive dividends (if their share class entitled them to do so) and their ownership appears at Companies House. But simultaneously, the company holds a call option over the unvested portion of those shares.

A call option gives the company the right to eliminate those unvested shares (see below for the elimination mechanism). Here is how reverse vesting works over time:

• At issuance, the company's call option covers 100% of the shares.

• As the vesting schedule progresses, the call option shrinks — releasing shares into the holder's permanent ownership month by month.

• If the holder leaves before full vesting, the company exercises its call option over the remaining unvested shares and either buys them back or converts them to a valueless share class (see below). If they’re bought back then the buyback price is almost always the original nominal value — typically £0.001 or less per share — so the departing holder receives essentially nothing for unvested shares.

• Once the full vesting period is complete, the call option expires and the holder owns all their shares outright with no further conditions.

The call option right is typically written into the Articles of Association and/or the Shareholders' Agreement.

Co-founders normally hold shares rather than options for three reasons:

Voting and control from day one. Shares carry voting rights immediately. A co-founder holding only options has no legal standing as a shareholder until they exercise — no ability to vote on board resolutions, pass special resolutions, or exercise pre-emption rights.

CGT holding period. The longer shares are held, the more favourable the capital gains treatment at exit. Starting the clock at incorporation maximises eligibility for Business Asset Disposal Relief.

No income tax event at issuance. The downside of awarding shares (as opposed to options) would normally be that the recipient pays income tax on those shares based on their market value. But at incorporation, the company has essentially no value above nominal. So the shares can be issued at nominal value without creating a taxable benefit.

Sometimes companies also issue reverse vesting shares to early employees beyond founders, since the “no income tax at issuance” feature applies equally to them. However, if companies have implemented an EMI scheme (or know they are going to do so) then it’s typically simpler to award those early employees EMI options instead.

Options vs. reverse-vested shares at a glance

Good leavers and bad leavers

Vesting schedules tell you when equity is earned. Leaver provisions tell you what happens to that equity when someone leaves. The two sets of terms work together, and both need to be defined clearly in your documents.

Good leavers — people who leave for reasons outside their control, such as illness, disability, redundancy, death, or retirement — typically keep their vested equity and may retain a portion of unvested equity depending on the scheme terms.

Bad leavers are increasingly defined narrowly in UK market practice. While older schemes treated voluntary resignation as a bad leaver event, the emerging standard tends to restrict bad leaver consequences to dismissal for cause (gross misconduct, serious breach of contract) and breach of non-compete obligations. Founders reviewing or negotiating equity documents should pay close attention to exactly where this line falls — it is one of the most commercially significant terms in any equity agreement.

A vesting schedule without clearly defined leaver provisions is incomplete. The two are inseparable.

What happens to unvested equity on departure

Unvested shares (reverse vesting)

The company exercises its call option over the unvested shares. There are two common mechanics for how that happens.

Direct buyback at nominal value: the company purchases the unvested shares at their nominal value per share — typically £0.01 or less. The departing holder receives essentially nothing for unvested shares.

Conversion to deferred shares: the unvested shares are converted to a new class — typically called "deferred shares" — that carry no economic rights: no dividends, no proceeds on a sale or liquidation, no voting rights. This route is commonly used for startups since they often have no retained profit, and hence are not able to repurchase shares, even at nominal value. The economic outcome is identical: the departing holder receives nothing of value.

Which mechanism applies depends on how the Articles of Association are drafted.

Vested shares on departure

Vested shares are owned outright. A departing holder generally keeps them. Some schemes — particularly those with institutional investors — may include mandatory transfer provisions that can require a departing holder to sell vested shares. But even if this exists, it would be at market value (vs. the nominal value sale of unvested shares).

Unvested options

Unvested options simply lapse on departure. No shares were ever issued, so there is nothing to buy back. The option agreement specifies the exact termination date — typically the last day of employment — unless the scheme rules provide a brief grace period.

Vested options on departure

Vested options do not automatically disappear when someone leaves. Most scheme rules provide a post-termination exercise window — typically three to twelve months from the termination date — during which the holder can exercise their vested options by paying the exercise price and receiving shares. After this window closes, vested options also lapse.

The documents that govern vesting

Getting the vesting schedule right is only half the work. The other half is making sure it is correctly documented — and that the documents are consistent with each other.

For shares (reverse vesting)

Articles of Association: the primary document for share-based vesting. The Articles set out the company's call option right over unvested shares, the mechanism for conversion to deferred shares or buyback. Any share class used for vesting purposes is defined here. The Articles are a public document filed at Companies House — the existence of the vesting structure is visible, but the individual schedule details are not.

Shareholders' Agreement: typically defines the good leaver and bad leaver categories for founders, the exercise mechanics for the company's call option, the buyback price, and any additional provisions such as mandatory transfer requirements or drag-along rights. This is a private document.

Service Agreement or Founder Agreement: records the start date, role, and vesting start date. Where vesting is conditional on continued employment or service, this document establishes that relationship.

For options

EMI Scheme Rules: the master document for an EMI option scheme. The rules set the overall framework — eligible participants, exercise conditions, leaver provisions, and the general parameters within which individual grants can be made.

Individual Option Agreement / Grant Letter: documents the specific terms for each grant — number of options, exercise price, grant date, vesting schedule. Each person who receives options gets their own grant agreement.

The consistency problem

A common and costly failure mode: the Articles, the Shareholders' Agreement, and the option scheme rules say slightly different things about good and bad leaver definitions, buyback prices, or vesting conditions. This typically happens when documents are updated at different times — after a funding round, for example, when investors require changes to the SHA that are not reflected in the Articles.

When a dispute arises, inconsistencies between documents become expensive legal arguments. The best protection is to have the full document set reviewed together by a single lawyer whenever a material equity event changes the picture.

Tracking vesting on your cap table

From a statutory perspective you need to maintain a “register of members”, which is essentially a register of all your shareholders’ shareholdings.

However, most companies use their cap table to serve as the register of members, but also to track wider information including: reverse vesting schedules attached to specific shareholdings; and option awards and their vesting.

This information is of critical importance to your investors, who typically focus on Fully Diluted Equity (i.e. what will their shareholding look like if all options vest and are exercised). You will also need to provide warranties to your investors as to the accuracy of your full cap table as part of any investment round.

The good news is that Shareflo allows you to track both share and option instruments, and allows you to manage vesting schedules on both. For every holding, Shareflo allows you to record vesting start date, vesting period and cliff period. In addition, you can specific if a certain number of shares or options are already vested at the grant date.

This is exactly the kind of detail that falls through the cracks when equity is managed in spreadsheets. Once you have multiple scheme participants with different grant dates, cliff dates, and leaver statuses, the only reliable approach is a system that tracks vesting automatically and keeps the record in sync with your statutory obligations.

Getting vesting right from the start: a checklist

Agree vesting terms before issuing any equity. Don't issue shares to a co-founder and add vesting later. It is technically possible to retrofit, but it creates potential tax events and legal complexity that are entirely avoidable if you plan ahead.

Use reverse vesting for co-founder shares. A standard four-year schedule with a one-year cliff is pretty standard, so think carefully before deviating from this.

Don't confuse the schedule with the leaver terms. Agreeing on a four-year cliff doesn't mean you've agreed on what happens if someone resigns in year two. Both need to be defined explicitly in your documents.

Use EMI options for employees wherever possible. Check eligibility early — most UK startups qualify. See our related article on EMI schemes (link below) for more details.

Make sure your Articles, SHA, and option scheme rules are consistent. Your cap table is a management tool, but the “definitive” determinant of an employee’s entitlements is your legal documentation - scheme rules, grant agreements, SHA, articles etc. If these documents were drafted at different times or updated separately, make sure you (or your lawyers) have ensured consistency between them.

Reflect vesting on your cap table, not just in the legal documents. The vesting schedule only protects you if someone is tracking it. Track grant dates, cliff dates, and vested-to-date figures for every holder and for every grant.