Founder vesting in India: reverse vesting, cliffs, leavers

Two founders split a company equally. One leaves after eight months and keeps half the equity, while the other builds the business for years. Founder vesting exists to stop that, and in India it has to be built from contracts and company law, because no statute offers a ready-made founder vesting scheme.

Here is how reverse vesting works, what company law allows when a founder leaves, and why investors ask for it. It is educational, not legal or tax advice.

What is founder vesting?

Founder vesting means a founder earns full rights to their shares over time by staying with the company. In India it is usually done as reverse vesting: the founder owns all the shares from day one and agrees that unvested shares can be taken back at a set price if they leave early.

The difference from an employee option matters. An employee with options buys shares later, under the rules covered in ESOP basics for founders. A founder with reverse vesting already holds the shares, votes them and appears on the register of members. What lapses month by month is the right of others to claw them back.

A note by the law firm Khurana and Khurana describes reverse vesting as a form of call option: the other founders can buy back unvested shares at a predetermined price if a founder leaves before an agreed event. It is not a separate class of shares.

How is reverse vesting done in India?

Reverse vesting in India is written into two documents: the shareholders' agreement, which sets the schedule and leaver terms, and the Articles of Association, which make those terms bind the company. The clawback itself then happens through a transfer of shares to other holders or, less often, a buyback under section 68.

Why the Articles matter

Under section 2(68) of the Companies Act, 2013, a private company's Articles must restrict the right to transfer its shares. Vesting terms are one such restriction. The Khurana note warns that a clause sitting only in the shareholders' agreement binds the founders personally, and that investors inspect the Articles, not only the agreement.

Route one: a transfer to other holders

The usual mechanic is a call option. When a founder leaves, the other founders, an investor, a nominee or an employee trust buys the unvested shares at the price fixed in the agreement, such as face value or the founder's cost. The company stays out of the transaction.

Price has a tax side. Under section 92(2)(m)(iii) of the Income-tax Act, 2025, a person who receives shares for less than their fair market value, by more than Rs 50,000, is taxed on the gap. A buyer of a leaving founder's shares at face value can face that charge, so a chartered accountant should check the price before it is written in.

Route two: a buyback by the company

A company can buy back its own shares only within section 68. The Articles must authorise it, and it is paid out of reserves available for dividends, the securities premium account, or the proceeds of an issue of a different kind of share or security. It is capped at 25% of paid-up capital and those reserves.

Other limits bite for a startup. A board resolution is enough only up to 10%; above that a special resolution is needed. Debt after the buyback can't exceed twice paid-up capital and reserves, and only one buyback offer is allowed a year. Section 68(5) lists the routes: a proportionate offer to all holders, the open market, or shares issued under stock option or sweat equity schemes.

A loss-making startup rarely has the reserves, and a buyback from one leaving founder is not among the listed routes. That is why the agreements the Khurana note describes lean on a call option in favour of other holders, and its advice is blunt: don't assume a buyback is available. Ask your company secretary what your Articles allow.

What vesting schedule and cliff are usual?

No Indian law sets a founder vesting schedule, and there is no official Indian dataset on one. The most-cited benchmark comes from Carta, a US-based cap table company: in its data on VC-backed and bootstrapped companies, a four-year schedule with a one-year cliff is the most common setup for founders and early employees.

The same Carta guide says about half of management grants and nearly 70% of employee grants carry a cliff, and at least 95% of cliffs fall at the one-year mark. Treat these as global, mostly US, figures rather than an Indian norm.

A cliff means nothing vests until the first anniversary; then a block vests at once and the rest vests monthly or quarterly. Founders who worked for years before the first round can ask for credit for that time. Whether investors agree is a negotiation. A sample schedule:

Sample: point in time	Share of founder's stake vested
Day one	0%
Month 12 (cliff)	25%
Month 24	50%
Month 36	75%
Month 48	100%

What are good leaver and bad leaver terms?

Leaver terms decide the price a departing founder gets for unvested, and sometimes vested, shares, based on why they left. A good leaver is treated gently; a bad leaver gets a low price. The definitions are negotiated in every deal, so read them as closely as the vesting schedule.

• Bad leaver triggers: the Khurana note lists breach of material obligations, fraud, termination for cause and voluntary resignation before an agreed milestone.
• Good leaver triggers: usually events outside the founder's control, such as death, permanent disability or removal without cause. These are drafting choices, not legal rules.
• Price: the note suggests the reduced price should apply only to unvested shares. Taking vested shares at a penalty price risks a challenge under section 74 of the Indian Contract Act, 1872, which deals with penalties.
• Non-compete: the note warns against tying bad leaver status to competing after exit, because section 27 of the same Act limits restraints of trade.

Vesting is a promise founders make to each other; the Articles are where the company can enforce it.

Why do investors ask for founder vesting?

Investors ask for founder vesting because they are backing a team, and unvested equity keeps that team in place. If a founder leaves early with a full stake, the company carries equity it can't use to hire a replacement, and the founders who stay do the work for a smaller share.

The Khurana note puts the risk plainly: a gap between contribution and ownership can make future fundraising difficult. In the NBER survey of 885 VCs, over 55% named the management team as the most important factor in investment success or failure. That is a global, mostly US, survey.

Vesting also shows up in diligence. Investors rebuild the cap table from the register and filings, so a vesting clause in the agreement that the Articles don't carry is a gap they will ask you to close. Cleaning up your cap table before a fundraise covers that reconciliation, and the term sheet clauses Indian angels should read sit next to vesting in the same negotiation.

How is a buyback of a founder's shares taxed?

Since 1 April 2026, money a shareholder receives in a buyback is taxed as capital gains under section 69 of the Income-tax Act, 2025, as amended by section 42 of the Finance Act, 2026. A founder holding more than 10% of an unlisted company counts as a promoter for this rule and pays an additional tax.

The Finance Act, 2026 sets that additional tax, for a promoter that is not a domestic company, at 10% of short-term gains and 17.5% of long-term gains. It is worth knowing before a buyback is chosen as the route. A chartered accountant should model the tax before any clawback.

What should founders put in writing first?

Write vesting into the shareholders' agreement and the Articles before the first outside cheque, while the founders still trust each other. Agree the schedule, the cliff, credit for past work, leaver definitions, the price in each case and who can buy the shares.

Then check the mechanics against company law and tax: whether the Articles permit the transfer or buyback, whether the price triggers section 92(2)(m), and how the register will be updated. A lawyer and a chartered accountant should review the drafts.

Questions

What is reverse vesting for founders in India?

Reverse vesting means a founder holds all their shares from the start but agrees that unvested shares can be bought back at a fixed price if they leave before the schedule ends. It is written into the shareholders' agreement and, to bind the company, into the Articles of Association.

What is a typical founder vesting schedule?

No Indian law or official dataset sets one. Carta, a US-based cap table company, reports that a four-year schedule with a one-year cliff is the most common setup for founders and early employees in its global data, with at least 95% of cliffs set at one year.

Can a company buy back a leaving founder's shares in India?

Only within section 68 of the Companies Act, 2013. The Articles must allow it, it is paid from reserves available for dividends, securities premium or certain fresh issues, and it is capped at 25% of paid-up capital and those reserves. Many startups lack reserves, so a transfer is often simpler.

What is the difference between a good leaver and a bad leaver?

A good leaver leaves for reasons the agreement treats as blameless, such as death, disability or removal without cause, and usually keeps vested shares. A bad leaver, defined by triggers like fraud or breach, sells unvested shares at a low price. The definitions are negotiated in each deal.

Is founder vesting the same as an ESOP?

No. An ESOP gives an employee or director an option to buy shares later at a price fixed in advance. With reverse vesting, the founder already owns and votes the shares; what lapses over time is the right of others to take them back.

Sources: Government of India (India Code), The Companies Act, 2013, sections 2(68) and 68 · Ministry of Law and Justice, The Income-tax Act, 2025, Gazette of India, 21 Aug 2025 · Ministry of Law and Justice, The Finance Act, 2026 (4 of 2026), Gazette of India, 30 Mar 2026 · Khurana and Khurana (Sainika Saren), Founder Vesting Clauses in Indian Startup Shareholders' Agreements, checked 11 Nov 2026 · Carta, Vesting: A guide to schedules, cliffs, and acceleration, 29 Jul 2026 · NBER Digest, How Do Venture Capitalists Make Decisions?, 30 Nov 2016

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.