David Siegel, a guest author and partner at Grellas Shah LLP, believes that the four-year founder equity vesting model with a one-year cliff has become a common standard among venture-backed startups, but it does not adequately address what happens when a founder leaves or is terminated.
The problem, according to Siegel’s argument, is that a departing founder may retain a permanent and substantial stake, which in the examples he cites may reach 15% or 20% of the company. Once these shares have vested, the traditional model does not provide a clear contractual mechanism for recovering them. The result is what the author calls “dead weight on the ownership table”: a stake owned by someone who is no longer involved in building the company but that remains influential in financing, governance, and the ultimate return.
How Does the Stake Affect the Company?
Siegel identifies three practical consequences of this situation. First, the morale of the remaining team may suffer when it works for years toward an acquisition or public offering while knowing that a significant portion of the return will go to a founder who is no longer involved in the work. Second, financing rounds and the expansion of option programs become more complicated because the outstanding share count includes the departing founder’s stake, potentially making the creation of a new option pool more costly in terms of dilution.
The third consequence concerns voting and control. A founder who retains a substantial stake may need to sign investment documents or shareholder-related resolutions, even if their timing priorities or risk tolerance differ from those of the active team.
Investors Are Becoming Less Willing to Tolerate the Problem
The author says that five to ten years ago, investors were more willing to accept a departing founder retaining a stake of 5%, 10%, or even 20%. He adds, however, that many newer investors want the former founder’s stake not to exceed 2.5% of the ownership table.
The absence of a pre-agreed recovery mechanism leads to the search for alternative solutions after the departure. Siegel describes pressure to surrender the shares, attempts to enlist investors or influence professional reputation, and then lawsuits that may ostensibly be brought over intellectual property or confidentiality, while the practical objective, in his view, is to recover the shares. He notes that such lawsuits may cost hundreds of thousands of dollars.
What Does the Author Propose?
Siegel divides the solutions into two areas. The first is control and voting rights, which he considers relatively easier to address. Formation documents could provide for the removal of voting rights upon the founder’s departure, or require the founder to grant a voting proxy to the current chief executive officer, along with a mandatory provision requiring participation in sale transactions or investment rounds. He also raises the option of creating a class of non-voting shares for departing founders and other service providers.
He considers the economic aspect more difficult. He proposes extending the vesting period to five or six years, with an uneven distribution that concentrates a larger percentage of vesting in the later years of service; he gives an example that grants 5% in the first year and 10% in the second year. He also proposes agreeing in advance on a mechanism and price for repurchasing vested shares after termination of service, with the possibility of leaving the founder with a permanent minimum of 2%.
Other alternatives include linking the amount of shares retained to the timing of the exit: if the company is sold three months after the founder’s departure, the founder would retain a stake reflecting the value they helped build, while that stake could automatically decrease if the sale occurs years after the departure. The author also proposes automatically converting the departing founder’s shares into a separate class with no voting rights and reduced economic rights.
Why Does This Discussion Matter?
The most important takeaway from Siegel’s argument is that a vesting schedule is not merely an administrative provision for allocating founder ownership, but a mechanism that later affects the company’s fundability, decision-making, and ability to avoid disputes. Therefore, postponing the problem until the departure stage may be too late, particularly when the original documents do not include a clear mechanism for dealing with vested shares.
The author specifically warns that minority founders may be most vulnerable to attempts to recover their stakes. For this reason, he urges them, before signing, to negotiate agreed termination compensation, a clear definition of “cause” events that justify termination, and protection for accelerated vesting. These proposals remain the author’s legal and analytical opinion, not a one-size-fits-all prescription for every company; moreover, the available text does not identify the jurisdiction or provide detailed contractual language, making review by a qualified lawyer essential before adopting any provision.