Buyback rights for founder held shares
Founders own their shares outright from the date they are issued, unlike employees who are granted options over shares they do not yet hold. Reverse vesting is a contractual arrangement, usually a shareholders' agreement or a specific vesting agreement, under which a founder agrees that if they leave before a set schedule completes, the company or the other founders can buy back the unvested portion, typically at nominal value, with the outcome often turning on good leaver / bad leaver classification.
The term reverse vesting reflects that the shares are already issued and are being clawed back, the reverse of options that vest into shares not yet issued under a standard vesting schedule.
Mechanics in a Dutch B.V. or UK Ltd
| Element | UK Ltd | Dutch B.V. |
|---|---|---|
| Legal basis | Articles of association plus a founder or shareholders' agreement with buyback rights | Shareholders' agreement, often combined with a call option in the articles or a separate deed |
| Buyback mechanism | Company or other shareholders exercise a call option over unvested shares | Call option exercised via notarial transfer, since Dutch share transfers require a notarial deed |
| Typical price | Nominal value for unvested shares | Nominal value for unvested shares |
| Board involvement | Board or majority shareholder approval to trigger buyback | Often requires cooperation of the leaving founder to execute the notarial transfer, so contracts should anticipate refusal |
Dutch share transfers must go through a civil law notary, which makes it important that reverse vesting agreements include a clear, enforceable mechanism, such as a power of attorney, in case a leaving founder does not cooperate, an issue that should be addressed directly in the founder equity agreement.
Investor protection against early founder departures
- It protects the company if a founder leaves early, so departing founders do not keep a large stake they no longer work to build.
- It aligns founders' incentives with long term commitment in the same way employee option vesting does.
- It reduces the risk of a large block of shares sitting with someone no longer contributing, which can complicate future rounds and decision making.
Questions founders ask before signing reverse vesting
- Do all founders need to agree to reverse vesting?
- Investors at a priced round will usually require it as a condition of investment, even if it was not in place at incorporation.
- Does reverse vesting apply to shares already vested before an investment round?
- Often founders get credit for time already worked, so only the remaining unvested portion is subject to the new schedule.
- What happens to reverse vested shares on a good leaver exit?
- Terms vary, but good leavers often keep more of their unvested shares, or the schedule is treated as accelerated, compared with a bad leaver who may forfeit unvested shares entirely.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.