Vesting and cliffs: how UK founder and employee equity actually vests over time

Vesting is the process by which a founder or employee earns the right to keep their equity over time rather than owning it outright from day one, and in the UK the near-universal default is four-year vesting with a one-year cliff: nothing is earned in the first twelve months, a quarter of the total grant vests all at once at the twelve-month mark, and the rest builds up gradually, usually monthly, over the following three years. It exists to protect the company, and its other shareholders, from someone leaving early while still keeping a large, permanent stake they did no further work to earn. For founders in particular, understanding exactly how vesting and cliffs work, and what happens on an early departure, is essential before signing a shareholders’ agreement, because it directly determines what they keep if things do not go to plan.

What is a vesting cliff, specifically?

A cliff is an initial period, almost always twelve months in UK startups, during which none of a grant vests at all, followed by a single point at which a defined chunk, typically a quarter of the total four-year grant, vests all at once. If the founder or employee leaves even one day before the cliff date, they forfeit the entire grant; the day after, they immediately hold 25% of it, with the remainder then vesting incrementally, usually in equal monthly instalments, over the followingundefinedmonths until the full four years are complete. The cliff exists specifically to protect the company from a scenario where someone joins, leaves within a few months, and would otherwise still walk away with a permanent, unearned stake in the business.

What does a standard four-year, one-year-cliff schedule actually look like in numbers?

Time from grant	Equity vested
0 to 11 months	0% (nothing vests before the cliff)
12 months (the cliff)	25% vests immediately
13 to 47 months	Remaining 75% vests in equal monthly instalments
48 months	100% fully vested

Why do founders vest their own shares, not just employees?

It can seem counterintuitive for a founder to agree to vest shares in the company they started, but investors routinely require it, and reverse vesting on founder shares (where a founder already legally owns the shares but they remain subject to a buy-back or forfeiture right until earned) has become standard UK market practice specifically because it protects the company and the other founders from one co-founder leaving early while keeping a large stake. Under a reverse vesting structure, the founder is the registered shareholder from day one and receives all the normal benefits of being a shareholder, dividends, voting rights, throughout, but the company (or the other founders) retains a contractual right to buy back or cancel the unvested portion if that founder departs before it has vested. Investors typically insist on reverse vesting for all significant founder shareholdings as a condition of investing, precisely because they are placing money into the team as much as the idea, and want assurance that a founder who leaves early cannot simply walk away with a large, fully-owned stake.

What is the difference between a “good leaver” and a “bad leaver”?

Most UK vesting arrangements classify a departing founder or employee as either a good leaver or a bad leaver, and the classification materially changes what they keep. A good leaver, someone who leaves for reasons like redundancy, long-term illness, or in some structures simply resigning after a reasonable period on good terms, typically keeps the vested portion of their shares at full value, while the unvested portion is bought back or cancelled, usually at nominal value. A bad leaver, typically someone dismissed for gross misconduct, or who resigns in circumstances the agreement defines unfavourably, generally faces harsher terms: in many UK shareholders’ agreements even their already-vested shares can be bought back at a low, nominal price rather than market value, rather than only losing the unvested portion. Because these definitions are set out in the shareholders’ agreement itself rather than being fixed by law, exactly what counts as a good or bad leaver, and what each actually receives, is negotiated and drafted on a company-by-company basis, and is one of the most consequential and most contested parts of the agreement for a founder to get right before signing.

Are vesting schedules ever varied from the standard four years and one-year cliff?

Yes. Four years with a one-year cliff is a strong market convention rather than a legal requirement, so it is common to see variations: some companies use a shorter three-year schedule, some drop the cliff entirely for employees joining after the company is already established, and it is increasingly common for a founder’s existing tenure before an investment round to count toward their vesting, so that a founder who has already been running the company for two years does not start vesting again from zero once investors come in. Any of these variations needs to be negotiated and clearly documented, since the default a lawyer or investor proposes is usually the standard four-year, one-year-cliff structure unless a founder specifically raises and negotiates an alternative.

How does vesting interact with EMI and other share option schemes?

Vesting most commonly applies to shares a founder or employee already holds (through reverse vesting) or to options granted under a share option scheme such as Enterprise Management Incentives (EMI), where the option itself, the right to buy shares at a fixed price in future, only becomes exercisable as it vests. In an EMI context, most scheme rules also include provisions that accelerate vesting on a company sale, so that option holders can exercise and realise value at the point of exit rather than losing anything still unvested, though the exact mechanics depend on the specific scheme rules a company has put in place. Whether vesting applies to shares already held or to options not yet exercised affects the tax treatment involved, which is a separate question from the vesting schedule itself but one worth checking alongside it.

What should a founder actually check before agreeing to a vesting schedule?

A founder should check precisely how “good leaver” and “bad leaver” are defined in the specific agreement being proposed, since these definitions vary between deals and materially affect the worst-case outcome of an early departure, whether any existing pre-investment tenure will be credited against the vesting clock, and what happens to unvested equity, whether it is cancelled, returned to the option pool, or reallocated among the remaining founders. It is also worth checking who controls the buy-back right and at what price, since a badly drafted clause can leave a departing good leaver receiving far less than the shares are actually worth, and getting a solicitor experienced in UK venture deals to review the specific leaver and vesting clauses before signing is standard practice precisely because the difference between well-drafted and poorly drafted clauses here has real financial consequences.

The practical takeaway

Vesting and cliffs exist to align a founder’s or employee’s financial interest with staying and contributing over time, not to catch people out, but the specific definitions of good leaver, bad leaver, and what counts toward the vesting clock vary enough between agreements that no one should assume the standard four-year, one-year-cliff structure automatically applies on the standard terms. Anyone, founder or early employee, being asked to accept a vesting schedule should read the actual leaver definitions and buy-back mechanics in the agreement itself, not just the headline vesting period, and get independent legal advice before signing, since these clauses are exactly the kind of detail that only becomes visible in practice when someone actually leaves.