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 (typically $0.0001 per share). A two-founder company might issue 5,000,000 shares each, with the founder cutting a $500 check. That low price is what makes the 83(b) election so valuable: it locks in the cost basis at $0.0001 before any future appreciation.
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. 83(b) election filed within 30 days 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 $7.5M) are typically converted into shares of acquirer stock that continue to vest, or repurchased. Double-trigger acceleration, present in roughly three-quarters of Series A deals per Cooley's data, 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 fractions of a cent), 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 (often a fraction of a cent per share). 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 is the 83(b) election so important for founder's stock?
An 83(b) election filed with the IRS within 30 days of purchase fixes the tax basis at the (near-zero) purchase price. Without it, each tranche of vesting becomes a taxable event at the then-current fair market value, which can produce six- or seven-figure tax bills as the company grows. Missing the 30-day window is one of the most expensive mistakes a founder can make. The IRS introduced Form 15620 in November 2024 as a standardized way to file the election.
How much equity do founders typically retain at exit?
Carta 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.