Founder explainer
Vesting, cliffs and ESOPs: how startup equity is earned
Vesting means earning equity over time instead of receiving it all at once. A cliff is a starting period during which nothing vests. Together they make sure shares go to people who stay and contribute.
The standard schedule
The most common schedule is four years with a one-year cliff. Nothing vests in the first year; at the one-year mark, 25% vests at once; the rest vests monthly or quarterly over the next three years. Someone who leaves after 11 months keeps nothing, and someone who leaves after two years keeps half.
| Time with the company | Share of grant vested (4-year, 1-year cliff) |
|---|---|
| 6 months | 0% |
| 12 months | 25% |
| 24 months | 50% |
| 36 months | 75% |
| 48 months | 100% |
Founder vesting
Investors often ask founders to put their own shares on a vesting schedule, sometimes giving credit for time already worked. It protects the remaining founders if one leaves early. Acceleration clauses can speed up vesting if the company is sold (single trigger) or if a founder is let go after a sale (double trigger).
ESOPs in India
Indian company law requires a minimum one-year gap between granting options and their vesting, so a one-year cliff is common. Employees are taxed when they exercise options, on the difference between the shares' fair market value and the exercise price, and again on any gain when they sell. Eligible DPIIT-recognised startups can let employees defer the tax due on exercise. See our ESOP taxation guide for the current rules.
Good leaver and bad leaver
Founder agreements often treat people differently depending on why they leave. A "good leaver" (for example, leaving through illness or being let go without cause) may keep vested shares and sometimes get a fair price for them; a "bad leaver" (leaving to join a competitor or dismissed for misconduct) may have to sell even vested shares back at a low price. These clauses are negotiated and worth reading carefully.
Exercise windows and refresh grants
Vested options usually have to be exercised within a set period after someone leaves, often 90 days in the US and set by the plan in India; some companies now offer much longer windows so departing employees are not forced to find cash for the exercise price and tax. Companies also give "refresh" grants to long-serving employees whose original grant has mostly vested, to keep them invested in the next stage of growth.
What employees should ask
- How many options am I getting, and what percentage of the fully diluted company is that?
- What is the exercise price, and when and how is tax due?
- What is the vesting schedule, and is there acceleration on a sale?
- How long do I have to exercise if I leave?
Frequently asked questions
- What happens to unvested options when someone leaves?
- They are usually forfeited and return to the option pool. Vested options typically must be exercised within a set window after leaving, under the plan's terms.
- Is a one-year cliff standard in India?
- Yes. Indian rules require at least one year between grant and vesting, which matches the usual cliff.
- Do founders' shares vest too?
- Often, yes. Investors frequently ask for founder shares to vest over three or four years, sometimes with credit for time already worked, so a departing founder does not keep a large stake.
- What is acceleration in vesting?
- A clause that vests some or all unvested equity early, usually when the company is sold (single trigger) or when someone loses their role after a sale (double trigger).
Keep learning
409A valuation explained, and India's ESOP equivalent
A 409A valuation sets the fair market value of a US startup's common stock for stock options. What it is, when you need one, and how ESOP valuation works in India.
What is an acquihire? How talent acquisitions work
An acquihire is an acquisition made mainly to hire a startup's team. How the deals are structured, who gets paid, and the newer license-and-hire variant.
Pre-money vs post-money valuation, with examples
Pre-money is what a startup is worth before new investment; post-money adds the new money. How to calculate both, investors' ownership and the option pool effect.
Startup dilution calculator
See how much founders own after each round, including option pool top-ups.
Official-source guides: How to get 100% tax exemption under Section 80-IAC · How to get DPIIT startup recognition in India
Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-22. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.