Founder's Stock
Also known as Founders Stock, Founder Shares, Restricted Founder Stock
Founder's stock is common stock issued to the founders at incorporation, almost always subject to vesting over four years with a one-year cliff and reverse-vesting repurchase rights for the company if the founder leaves. There is no separate legal class called founder's stock; it is just early-priced common stock with restrictions in a stock purchase agreement.
In depth
At incorporation, the founders buy common stock from the newly formed company at a nominal price (often a small fraction of one cent per share). A two-founder company might issue several million shares each for a cheque of a few hundred dollars in total. That low price matters because, in tax systems that allow it, a timely election to be taxed at grant locks in the cost basis before any future appreciation; without such an election, each subsequent tranche of vesting can become a taxable event at then-current market value. Specific elections, forms, and deadlines vary by jurisdiction.
The shares are then subjected to a reverse-vesting arrangement in the founder stock purchase agreement. The company retains the right to repurchase unvested shares at the original purchase price if the founder's service terminates. Standard schedule is four years with a one-year cliff: 25% vests at month 12, then 1/48th per month after. Investors expect this structure at the Series A and will require it as a condition of the round if the founders did not impose it on themselves at incorporation.
Why it matters
Founder vesting protects the company and the cap table. A two-founder startup where one cofounder quits after six months without vesting walks away with 50% of the equity for less than a year of work. That stranded common stock blocks the cap table and complicates every future round. With vesting and repurchase rights, the company recovers the unvested portion and can re-allocate it. Acceleration provisions (single-trigger on change of control, or the more common double-trigger requiring both a sale and involuntary termination) protect the founder against being fired immediately post-acquisition to deny them the rest of their equity.
Worked example
Founder receives 5,000,000 shares of common at $0.0001 per share. Cost: $500. Where the relevant tax regime allows, a timely election fixes the cost basis at $500 total. Four-year monthly vesting with a one-year cliff.
| Time elapsed | Vested shares | Unvested (subject to repurchase) |
|---|---|---|
| 11 months | 0 | 5,000,000 |
| 12 months (cliff) | 1,250,000 | 3,750,000 |
| 24 months | 2,500,000 | 2,500,000 |
| 48 months | 5,000,000 | 0 |
If the company is acquired at month 30 for $200M and the founder's shares are worth $20M, with no acceleration the unvested 1,875,000 shares (worth roughly $7.5M) are typically converted into shares of acquirer stock that continue to vest, or repurchased. Double-trigger acceleration, common at Series A, would fully vest the founder if they are terminated without cause within a defined window after closing.
Frequently asked
Is there a separate legal class for founder's stock?
No. Founder's stock is common stock. The term is colloquial. What makes it distinct is the timing (issued at incorporation when the share price is a nominal amount), the volume (millions of shares each), and the contractual restrictions (vesting, repurchase rights, transfer restrictions) layered on via the founder stock purchase agreement.
What happens if a founder leaves before fully vested?
Unvested shares are repurchased by the company at the original purchase price (a nominal amount). A founder who leaves after two years on a standard four-year monthly schedule with a one-year cliff keeps half their shares; the company buys back the other half and returns those shares to the option pool or holds them as treasury stock.
Why does the tax treatment of restricted founder stock matter so much?
Many tax systems treat restricted stock as taxable when restrictions lapse (i.e., as each tranche vests), measured against the then-current fair market value. As the company grows, that can produce large tax bills tied to illiquid shares. Several jurisdictions allow an election to be taxed instead at the time of grant on the (near-zero) purchase price; making that election within the local deadline is one of the most consequential decisions a founder makes at incorporation. The mechanism and deadlines vary by country, so confirm with local counsel.
How much equity do founders typically retain at exit?
Industry data on venture-backed exits shows founder ownership compressing through each round. A solo founder who raised seed, A, B, and C often holds 10-20% of fully diluted equity by IPO. Two-founder teams split that further. The combination of round-by-round dilution and the option pool refresh at each round drives the math.