Vesting

What does vesting mean?

Vesting (the gradual earning of an equity stake) is a contractual arrangement under which founders or employees gradually earn their stake in the company over a set period. If the entitled person leaves earlier, that person keeps only the part earned up to then; the remainder lapses or must be transferred back. The part already earned is called vested (in German, unverfallbar), because it is retained even on departure. The principle resembles a savings plan in which, after a start-up period, a further fixed portion of the stake is added each month. In contracts, the arrangement is also called a vesting clause or vesting model, and the timetable a vesting plan (vesting schedule).

In funding rounds, the term appears in two places. For founders who already hold their shares, vesting secures their commitment to the company that the investors are financing. For employees, it determines which part of a grant under the equity programme is retained after departure. For founders, the arrangement sits in the shareholders' agreement, the contract among the shareholders, often as part of the participation agreement. For employees, it sits in the plan terms and the individual grant. The key terms are usually already set out in the term sheet, the declaration of intent with the main points of a funding round.

Building blocks of a vesting plan: term, cliff and accrual

A few parameters determine what share of the stake is earned on a given date:

• Term (vesting period): the total period after which the stake is fully earned. Three to four years are common, for employees predominantly four.
• Waiting period (cliff): an initial period in which nothing is earned yet. When it expires, the arithmetically accrued part vests all at once. Twelve months is usual.
• Accrual: the rhythm in which further portions are added after the cliff, usually monthly, less often quarterly.
• Start (vesting commencement date): the day from which the term runs. Candidates are the start of employment, the grant or the notarisation of the funding round.
• Credit: Part of the stake can count as earned immediately on signing the contract, to reflect build-up work already done.

Formula: earned shares = granted shares × elapsed months / term in months, once the cliff has expired; before that, it is zero.

Milestone-based models, in which shares vest on reaching defined targets, are rarer, because targets shift and their fulfilment is prone to dispute. For the case of a sale, many plans contain an acceleration that makes parts not yet earned vest early; triggers and variants are explained in the entry on accelerated vesting.

Reverse vesting for founders of a GmbH

Founders of a GmbH (German limited liability company) are owners of their shares from the outset and appear in the list of shareholders. A gradual build-up of the stake is therefore not possible; what is regulated instead is the reversion. In reverse vesting, each founder undertakes, on leaving early, to give up part of the shares. This part becomes smaller with each month of the term until, after it ends, there is no longer any obligation to surrender.

Two routes are available for implementation, which in practice are often agreed side by side:

• Purchase right (call option): Co-shareholders, investors or the company itself receive the right to acquire the unvested shares at a price determined in advance. Where the company itself acquires, Section 33 of the German Limited Liability Companies Act (GmbHG) sets limits. The contributions on the shares must have been paid in full, and the purchase price must not encroach on the assets required to maintain the share capital.
• Redemption (Einziehung): The shareholders' meeting resolves to redeem the shares concerned against compensation. Without the consent of the person concerned, this is possible under Section 34(2) GmbHG only if the conditions were laid down in the articles of association before that person acquired the share. The compensation, too, may be paid only out of assets that exist beyond the share capital.

What consideration the departing founder receives depends on how the departure is classified. The contracts distinguish the good leaver, whose departure is not held against the person, for example in the case of illness, from the bad leaver. The latter was, for example, dismissed without notice for a serious breach of duty. Vesting and leaver rules therefore belong together: vesting fixes the quantity, the leaver rule the price. If this price is far below the value of the shares, the transfer can trigger gift tax under Section 7(7) of the German Inheritance and Gift Tax Act (ErbStG); details are in the entry on bad leaver.

Why investors require founder vesting

In a funding round, investors pay for the future development of the company, and that depends on the founders. Without vesting, a founder could leave shortly after payment and keep the full stake, while no shares would be available for a successor. This also protects the founders among themselves. In later rounds, new investors occasionally demand that the term start again in whole or in part; what is then negotiated is the credit for the time already elapsed.

Vesting in employee programmes

For employees, the grant builds up over the term. In German growth companies, they usually receive virtual shares: not a share in the company but a contractual claim to a payment on exit, that is, on the sale of the company or an IPO. The amount of the payment is measured by the proceeds per share. Vesting here determines how many of the granted virtual shares remain after a departure. For genuine options, it determines from when and to what extent the options may be exercised; the time frame for this is described by the exercise period.

Earned does not mean, in virtual programmes, that a payment claim arises immediately; payment remains tied to the exit. The plan terms are pre-formulated contract terms. They are therefore subject to review of standard terms under Sections 305 et seq. of the German Civil Code (BGB), that is, to judicial review of whether they place employees at an unreasonable disadvantage. Clauses under which virtual shares already earned lapse without compensation on resignation generally do not withstand this review, following a decision of the Federal Labour Court (Bundesarbeitsgericht) of 2025. In the same decision, the court struck down a clause under which earned shares were to lapse after departure twice as fast as they had been earned. How the programmes as a whole are built is explained in the entry on ESOP.

Vesting in due diligence and company sales

In due diligence, the detailed review before an investment or purchase, investors and buyers examine the vesting status of all participants. They ask whether the term, start and course to date of each grant are documented and whether departed persons were settled in accordance with the agreed rules. The figures must match the cap table, the overview of all participants and their shares. Oral promises and grants without a fixed start are typical findings that can delay a process by weeks.

On a company sale, the vesting status determines which part of the stakes counts economically. If the founders sell all their shares, their reverse vesting ends at closing; the tie to the acquirer is then governed by the purchase agreement. For employees, the plan determines whether unvested virtual shares lapse on exit, are accelerated or are converted into a new claim tied to continued service. The acquirer takes the costs of the programmes into account in the purchase price.

Worked example: calculating vesting with cliff and credit

A founder holds 12,000 shares with a nominal value of EUR 1 each. The shareholders' agreement provides for reverse vesting: term 48 months, cliff twelve months, then monthly accrual. The co-shareholders may acquire unvested shares at nominal value. In the last funding round, investors paid EUR 150 per share.

• Accrual per month: 12,000 / 48 = 250 shares
• Cliff expiry after 12 months: 12 × 250 = 3,000 shares are earned at once, after which 250 are added monthly
• Departure after 10 months, that is, before the cliff expires: 0 shares are earned, all 12,000 shares are subject to the purchase right
• Departure after 21 months: 21 × 250 = 5,250 shares are earned; 12,000 minus 5,250 = 6,750 shares are to be surrendered for EUR 6,750
• Same point in time, but with credit of twelve months on signing: 33 × 250 = 8,250 shares are earned; 12,000 minus 8,250 = 3,750 shares are to be surrendered
• Effect of the credit: 8,250 minus 5,250 = 3,000 shares, valued at the price of the last round 3,000 × EUR 150 = EUR 450,000

The round price serves only as an order of magnitude, because investor shares with preferential rights are worth more than ordinary shares. The example nevertheless shows why start and credit are not formalities: a few months' difference shifts a considerable part of the stake.

Distinctions: vesting, accelerated vesting, leaver rules and exercise period

• Accelerated vesting: the contractual exception to the schedule for the case of a sale. It presupposes an existing vesting plan and changes only its end.
• Good leaver and bad leaver: regulate the consideration on departure. Vesting, by contrast, determines what proportion of the stake has already been earned at that point.
• Exercise period: concerns only genuine options and describes when earned options can be exercised.

Common mistakes

• Vesting only at the investors' request. If founder vesting is first negotiated in the term sheet, the founders agree under time pressure on questions that could have been settled without conflict at incorporation.
• Open start date. If it is not fixed whether the term begins with the start of employment, the grant or the notarisation, the cliff and the earned share shift by months.
• No price for the reversion. Reverse vesting without a clear rule on the consideration leads to a dispute over the value of the shares on the first departure.
• Redemption without a sound basis in the articles. If the redemption rule is missing from the articles of association or was inserted without the consent of those concerned, the reversion cannot be enforced this way against the founder's will.
• Dormant periods and part-time work not regulated. Without an express rule, it remains open whether the term continues to run during parental leave, garden leave or reduced working hours.

Frequently asked questions

Over what period does typical vesting run?

Usually four years with a cliff of twelve months. For founders, three years also occur, often combined with credit for the time before the funding round. There is no statutory requirement for the GmbH.

What does cliff mean in vesting?

The cliff is the waiting period at the start, usually twelve months. Anyone who leaves before it has earned nothing: employees lose the entire grant, founders must surrender all shares covered by vesting against the agreed consideration. When the cliff expires, the accrued part vests all at once, with a four-year term one quarter.

What is the difference between vesting and reverse vesting?

The difference lies in direction. With vesting, a grant builds up, typical for employees. With reverse vesting, founders hold their shares from the outset and must give up a part on leaving early, which becomes smaller each month. Economically the result is the same.

Does reverse vesting have to be notarised?

As a rule yes. The obligation to assign shares in a GmbH requires notarial recording under Section 15(4) GmbHG. Redemption rules belong in the articles of association, and amendments to them are also notarised under Section 53 GmbHG. An agreement made only in private written form would be invalid for lack of form.

Does the vesting of virtual shares trigger tax?

No. As long as nothing is paid out, no wages are received. Only the payment on exit is taxable, and it is subject to wage tax withholding. The taxation of genuine and virtual participations is explained in the entry on taxation of options.

The Roemer Capital view

We count vesting rules as part of the governance pillar, from which investors read whether a company is investor-ready. Before a funding round starts, we reconcile, for each founder and each grant, term, start, credit and current status with the cap table. We clarify inconsistencies such as a grant without a start date or a departed co-founder who has not been settled with the company before investors find them in due diligence.

We file the overview of vesting statuses in the data room so that it matches the contracts and is immediately available on request. New or amended rules are implemented by the company's law firm; beforehand we calculate what the individual variants mean for each founder's stake.