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I’m Terrified of Founders Without Reverse Vesting

Meeting a founder without a reverse vesting agreement feels like watching someone snowboard without a helmet — an act of pure irrationality.

Introduction

There are many reasons why founders should have a reverse vesting agreement, and — surprisingly — protecting investors might be the least important one.

Reverse vesting can literally save your startup if one of the founders decides, or is forced, to leave. It turns a potentially existential risk into a manageable one.

For simplicity, I’ll refer to “shares” as if the company were a corporation, but the same concepts apply to LLCs that use units instead of shares.

If you already know what reverse vesting is, feel free to skip ahead. Otherwise, keep reading — this part matters.

What Is Reverse Vesting?

Metaphorically speaking, reverse vesting is to founders what stock options are to employees.A company can’t be incorporated without owners of its shares, so this agreement works in reverse: founders start with a set of shares that the company can repurchase at nominal value if they leave before reaching a certain time threshold.

You can include all the usual terms — a cliff period, monthly or annual vesting, or any creative structure you want. The key difference is that, unlike stock options (where ownership is acquired after exercising), reverse vesting starts with full ownership that gradually becomes “earned.”

A common misconception: unvested founder shares don’t go to investors. They return to the company’s treasury, benefiting both founders and investors equally.

Example: Cap table — Founder A (40%), Founder B (40%), VC1 (15%), VC2 (5%). Founder B leaves after vesting half their shares, keeping 20%.The other 20% returns to the treasury, leaving 80% of shares outstanding — owned by founders and investors. That 20% can then be redistributed pro-rata or used to expand the ESOP.If used for the ESOP, everyone benefits — with no dilution.

Why Founders Without Reverse Vesting Terrify Me

Too Innocent

Founders often think they don’t need it because they’re lifelong friends, relatives, or couples. “We’ve known each other for years, we’ll never split.”But life changes — people change.Maybe your cofounder falls in love abroad, or your friend decides to become a painter, or your spouse needs to move to care for family.

Failing to anticipate low-probability, high-impact events is reckless. Ignoring simple tools to mitigate existential risk is negligence.

They Don’t Think Like Owners

Founders are the majority owners of the startup.Before inviting external investors, they should protect the business from a cofounder’s potential exit.Otherwise, they end up with a dirty cap table — a death sentence in venture capital.

In VC, a departed cofounder with a large ownership stake is a major red flag.

They Confuse Work and Friendship

Regardless of personal history, a startup must operate with professional safeguards.Statements like “We’ve worked together for ten years” or “He’s my brother, we share everything” explain decisions emotionally, not rationally.

The cap table should make business sense. Personal commitments can be handled privately.If you want to promise shared gains beyond the company’s structure, write a side letter, make a personal pact — but don’t bake it into your equity structure.

They Don’t Realize How Long the Journey Is

Founders often believe that after two or three years of building, they’ve already “earned” their shares.But most startups need five to ten years to reach a meaningful exit.

If it’s already fully vested, incentives disappear.If finances allow, compensate with salary or performance bonuses, but set a longer reverse vesting schedule that matches the real horizon of a startup.

The Free Rider Problem

After years of low pay and high stress, a founder might feel tempted to leave for a better-paying job while keeping their full equity — waiting for a future exit.

Without reverse vesting, this is easy — and dangerous.

From a game theory perspective, it creates a coordination problem.Imagine three founders, each owning equal shares. Everyone knows success could take another four years with low probability but high reward.Each founder individually has an incentive to quit and still keep equity.If one leaves, others may follow — and the startup collapses.

(If you’re stuck here, check out our piece “1/n Is Almost Always a Bad Idea” for thoughts on splitting equity.)

Analysis Paralysis

Sometimes founders avoid reverse vesting because they can’t agree on equity splits or vesting terms.Even then — start with something.

You can always adjust agreements later, but having none is far worse.In fact, in later rounds, investors often ask to extend or revise vesting schedules anyway.Start simple, then refine.

In Summary

Implementing a reverse vesting agreement doesn’t just protect your startup — it strengthens long-term alignment and trust among founders.

A few closing thoughts:

- Don’t postpone hard conversations. Address equity and vesting early. It’s easier now than later.

- Be flexible but firm. You can adjust over time, but make sure everyone truly understands the initial terms.

- Seek expert advice. Legal and financial guidance can save you from costly mistakes.

- Communicate openly. Clear expectations build trust and reduce future conflict.

- Think long-term. Building a startup is a marathon, not a sprint. Design agreements with that in mind.

Taking these precautions early can make the difference between success and failure.Don’t underestimate the importance of reverse vesting — it’s not bureaucracy, it’s survival.