Founder Vesting in India: Cliffs, Reverse Vesting and What Happens If You Leave

Vesting and reverse vesting are not the same mechanism

In a straightforward vesting arrangement you become entitled to shares over time. In reverse vesting, which is far more common for Indian founders, the shares are issued to you at the start and the company or the other shareholders have a right to buy back the unvested portion if you leave before the schedule completes.

The distinction matters for several practical reasons. Reverse-vested shares are yours on the register from day one, so you hold voting rights and your shareholding is visible in the cap table. It also means the operative provision is a buy-back right rather than a failure to issue, which is why the price at which the buy-back happens is the clause that actually decides the outcome.

The cliff

A cliff is a period at the start during which nothing vests, followed by a catch-up. A one-year cliff on a four-year schedule means a founder who leaves at month eleven has vested nothing, while one who leaves at month thirteen has vested roughly a quarter.

The cliff exists to handle the case where a co-founder turns out not to be a co-founder. It is reasonable, and founders should be wary of a structure with no cliff at all, since it means someone can leave in month two holding meaningful equity. What deserves attention is a cliff considerably longer than a year combined with a long overall schedule, which concentrates a great deal of risk in the early period.

Good leaver, bad leaver, and the price

Most agreements distinguish between leaving in circumstances the company accepts and leaving in circumstances it does not. A good leaver typically keeps vested shares and has unvested shares bought back at a fair or agreed value. A bad leaver may face buy-back of vested shares as well, often at nominal value or at the price originally paid.

Read the definitions rather than the labels. Bad leaver is sometimes defined narrowly, covering fraud or serious misconduct, and sometimes drafted to include voluntary resignation, which converts an ordinary decision to leave into a forfeiture event. That single drafting choice can be worth more than everything else in the agreement.

Where Sections 73 and 74 come in

A buy-back of vested shares at nominal value, triggered by departure, is in substance a forfeiture of value. Sections 73 and 74 of the Indian Contract Act direct that compensation for breach is reasonable compensation for loss actually suffered, with any stipulated sum operating as a ceiling rather than an amount automatically due.

Whether a particular leaver provision would be characterised and treated that way depends on how it is drafted and on the facts, and this is a genuinely fact-specific area. The useful point at drafting stage is that a provision framed as a proportionate response to a real loss stands on firmer ground than one framed as a penalty for leaving, and it is worth negotiating with that distinction in mind.

What to negotiate

• A bad leaver definition limited to genuine misconduct rather than including ordinary resignation.
• Fair value, or a defined valuation mechanism, for good leaver buy-backs rather than nominal value.
• Acceleration on a change of control, so a sale does not strip an unvested founder.
• Credit for time already served before the agreement was signed, which founders frequently forget to ask for.
• Consistency between the vesting provisions and the transfer restrictions in the articles.