Founder Equity and Vesting When a Co-Founder Leaves

By Hank FasthoffJuly 5, 2026

Founder equity determines who owns the company. Vesting determines how much of that ownership each founder keeps after a departure. If you issue every share outright on day one, a founder who leaves after a few months may keep the same percentage as the founders who spend years building the business.

Your documents should connect the equity grant to continued service, state what happens when service ends, and provide a workable repurchase process. Corporations and limited liability companies use different documents and can produce different tax results, so the structure has to match the entity that issued the interest.

Issue Equity After Formation

A corporation must exist before it can issue stock. After formation, the board should approve the issuance, the number and class of shares, the consideration, the vesting terms, and the stock purchase agreement. Each founder should sign the agreement, pay the approved purchase price, assign relevant intellectual property, and receive evidence of the issuance in the company’s stock ledger.

Par value and fair market value serve different purposes. A certificate of incorporation may set a nominal par value, but that figure doesn’t establish the stock’s fair market value for tax purposes. The board should determine the consideration and document why the issuance complies with the governing statute, including Texas Business Organizations Code Sections 21.159 through 21.161 for a Texas corporation or Sections 152 and 153 of the Delaware General Corporation Law for a Delaware corporation.

If you use an LLC, you should authorize founder interests through the company agreement, written consent, and interest grant documents. If the LLC is taxed as a partnership, the parties also need to determine whether the founder receives a capital interest or a profits interest because those interests can receive different federal tax treatment.

Every equity issuance must qualify for an exemption from federal and state securities registration or be registered. SEC Rule 701 covers certain compensatory sales by nonreporting companies under written plans or compensation contracts, subject to eligibility, amount, and disclosure requirements. Your company may rely on another exemption depending on who receives the equity, what the founder provides, and how the transaction is structured.

Reverse Vesting

Founders commonly buy their shares when the company is formed, subject to the company’s right to repurchase the unvested portion if service ends. Lawyers often call that arrangement reverse vesting. The founder owns the issued shares, but the company’s repurchase right decreases as the shares vest.

Stock options use a different structure. An option provides a contractual right to buy shares after the option vests and the holder exercises it. With restricted founder stock, the company issues the shares at the outset, subject to the restrictions stated in the stock purchase agreement.

Your agreement should define the service that earns vesting, the vesting commencement date, the schedule, the events that end service, and the treatment of leaves of absence. It should also state whether service as an employee, officer, director, or consultant counts and whether a change from one role to another affects vesting.

Four Years With Vesting After Year One

A vesting schedule that runs for four years and begins vesting after the first year is common among venture funded companies, although founders may select another schedule. Under that schedule, no shares vest during the first 12 months. At the first anniversary, 25% vest at once, and the balance commonly vests in 36 equal monthly installments.

Suppose a founder receives 2,400,000 shares. At month 12, 600,000 shares vest. Another 50,000 vest each month, producing 1,200,000 vested shares at month 24 and 1,500,000 vested shares at month 30. If that founder leaves at month 30, the company may repurchase the remaining 900,000 shares only if the signed agreement provides that right and the company exercises it as required.

Founders who worked before formation may receive credit toward the vesting schedule, but the documents should state the credited service date. That credit affects both retention and ownership, so the board and every founder should understand it before approving the issuance.

Section 83(b) and Restricted Stock

Section 83 of the Internal Revenue Code generally taxes property transferred for services when the recipient’s rights become transferable or substantially vested. For restricted stock, the founder may recognize ordinary income as each portion vests, based on its fair market value at that time minus the amount paid for it.

A Section 83(b) election changes the timing. The founder elects to include in income the fair market value of all transferred property at the transfer date, less the amount paid, without regard to restrictions that will lapse. A newly formed company may have a low share value, but par value establishes neither fair market value nor taxable income.

You must file the election no later than 30 days after the property transfer. If day 30 falls on a Saturday, Sunday, or legal holiday, Section 7503 extends the deadline to the next day that isn't a Saturday, Sunday, or legal holiday. Form 15620 is optional because a signed written statement that satisfies Treasury Regulation Section 1.83-2 also satisfies the filing requirement.

You can submit Form 15620 through the IRS online forms system or file it by mail. A founder must also provide a copy to the person for whom the services were performed and, when different, the person who received the property. You should keep the signed election, proof of timely submission, and proof that the required copies were delivered.

An election can produce a poor result when the stock already has substantial value or the founder later forfeits it. The decision depends on value, purchase price, forfeiture risk, and the founder’s tax position. You should obtain tax advice before treating an 83(b) election as a routine filing.

Tax Treatment of LLC Interests

An LLC taxed as a partnership may issue a capital interest or a profits interest. A capital interest generally entitles the holder to part of the proceeds if the LLC sold its assets at fair market value and liquidated when the interest was granted. A profits interest generally participates in future profits and appreciation without receiving existing liquidation value.

Revenue Procedure 93-27, 1993-2 C.B. 343, provides a safe harbor for certain profits interests transferred for services, subject to stated exceptions. Revenue Procedure 2001-43 addresses a qualifying profits interest that is substantially nonvested. If the LLC and service provider satisfy its conditions, they treat the recipient as an owner from the grant date, report the recipient’s distributive share during the vesting period, claim no compensation deduction for the interest, and needn’t file an 83(b) election.

The safe harbor covers only qualifying profits interests. Capital interests, grants outside the revenue procedures, and LLCs with a different tax classification require separate analysis. Your company agreement, grant document, capital accounts, tax reporting, and election decision should follow the same tax position.

Acceleration Provisions

Acceleration permits some or all unvested equity to vest when specified events occur. Single trigger acceleration uses one event, commonly a change of control. Double trigger acceleration requires a change of control plus a second event, commonly termination without cause or resignation for good reason during a defined period after the transaction.

Your agreement should define change of control, cause, good reason, and the period for the second trigger. It should also address what happens when an acquirer assumes, replaces, cashes out, or terminates the equity. Calling the provision double trigger won’t resolve a dispute when the operative events lack precise definitions.

Acceleration terms divide transaction value and retention risk. Founders may seek protection if an acquirer removes them after closing, while investors and buyers may want continued service. The percentage accelerated and the triggering events should reflect that bargain.

What a Departing Founder Keeps

A departing founder’s signed agreements determine the equity result. Service termination leaves unvested shares outstanding until the agreement’s repurchase mechanism takes effect. The company must have a valid repurchase right and must follow the stated period, price, notice, and payment procedure. Some agreements state that repurchase occurs automatically, while others require board action or written exercise.

After vesting, other restrictions may continue to govern the shares. Rights of first refusal, transfer restrictions, obligations to join a sale, company call rights, bad leaver provisions, and securities laws can limit a sale or require a transfer. A founder who vested 62.5% of a grant covering 2,400,000 shares may keep 1,500,000 shares after departure, subject to those provisions.

If the company has a right to buy vested shares at fair market value, the agreement should define the valuation date, valuation standard, permitted discounts, appraisal process, payment terms, and procedure for a dispute. When the agreement says only fair market value, the parties may face a second dispute over price.

Repurchase Rights and State Law

Corporate law may restrict a company’s ability to pay for its shares even when the contract authorizes a repurchase. Delaware General Corporation Law Section 160 restricts a corporation’s purchase or redemption of its shares when capital is impaired or the transaction would impair capital, subject to statutory exceptions. Texas Business Organizations Code Sections 21.302 and 21.303 govern corporate distributions and limit them based on solvency and surplus rules.

You should also review the requirements under state law for transfer restrictions and notice. Delaware General Corporation Law Section 202 recognizes specified written restrictions and addresses notice on certificates and notices for uncertificated shares. Texas Business Organizations Code Sections 21.210 through 21.213 authorize reasonable restrictions, including purchase obligations and rights of first refusal, subject to the statute’s requirements.

For a Texas LLC, Section 101.052 of the Texas Business Organizations Code allows the company agreement to govern many relations among members and the company, subject to statutory limits on contractual modification. Your company agreement should contain the vesting, forfeiture, repurchase, transfer, valuation, and payment terms that apply to a departing member.

Equity Splits and Prior Contributions

Vesting controls how founders earn an agreed equity grant over time. Founders must separately determine the initial split. They may contribute different amounts of cash, code, intellectual property, customer relationships, industry experience, or time devoted to the company, and the initial split can reflect those differences.

If one founder worked before formation, you can address that contribution through vesting credit, separate consideration for an intellectual property assignment, a different grant size, or another documented term. You should avoid promising equity before the company exists and then leaving the board, tax, securities, and ownership records to reconstruct the promise after the business gains value.

Equal ownership can fit founders who assume comparable roles, risk, and time commitments. An unequal split can fit a team with materially different contributions or responsibilities. In either case, each founder should know the grant, vesting schedule, voting rights, economic rights, and departure terms before signing.

Financing Diligence

Investors commonly review the certificate of formation, board approvals, stock purchase agreements, vesting schedules, Section 83(b) records, capitalization table, intellectual property assignments, and securities exemption records. Missing approvals or inconsistent documents can delay financing and change the economic terms required to close it.

A financing may require founders to accept new vesting terms, correct prior issuances, surrender excess shares, or sign additional restrictions. Those changes require the approvals and consents applicable to the company and its existing documents. Rewriting a founder’s signed contract or taking vested property requires legal authority beyond a board resolution.

When a Founder Leaves

You should determine the founder’s service termination date and calculate vesting under the agreement. The company should then follow every notice, approval, payment, and deadline requirement for repurchasing unvested shares or exercising any right over vested shares.

Corporate records should reflect the result. You should update the stock ledger or LLC ownership schedule, capitalization table, voting records, and tax records, and you should preserve the purchase agreement, board action, notices, payment evidence, and Section 83(b) election.

You should address a founder’s operating roles separately from equity ownership. The departure documents should cover resignations from officer and board positions, transfer of account credentials, return of company property, continuing confidentiality and invention assignment obligations, and access to customer, financial, code, and platform accounts.

Any separation or release agreement should match the equity documents. It should identify the shares retained or repurchased, payment terms, representations about company property and intellectual property, continuing obligations, and any release of claims. Conflicting documents can turn a negotiated departure into a second dispute.

Your company should issue founder equity only after formation, obtain approval from the people with authority, receive the required consideration, and use signed vesting and repurchase terms. When a co-founder leaves, those records determine who owns the company after the departure and whether the business can finance its next stage without renegotiating its past.