Founder shares

Founder shares are the equity holdings granted to company founders, typically granted upon incorporation or shortly after. They may be subject to vesting schedules (especially in venture-backed startups), carry superior voting rights (in dual-class or multi-class structures), or include other protective provisions, but generally represent the founder’s ownership stake and the engine of their long-term wealth.

How founder shares are granted

When a startup is incorporated, the founders are typically issued common stock at minimal cost (a few pennies per share). This is done to capture the founder’s long-term upside from incorporation forward. A typical grant is 1 million shares granted to each of two founders, though this varies widely.

In venture-backed companies (the startup model), founder shares are subject to a vesting schedule. The logic is that the founder’s shares are compensation for their labor going forward; if the founder leaves after six months, they should not be fully vested in a stake that was intended to compensate them for years of service.

A typical four-year vesting schedule with a one-year cliff works like this:

• Day 1: Founder is granted 1 million shares.
• Year 1 cliff: After one year of employment, 250,000 shares vest (25%).
• Months 13–48: The remaining 750,000 shares vest monthly (about 17,361 per month).
• Year 4: All shares are fully vested.

If the founder leaves after 6 months, they are fully unvested and typically forfeit their shares (or they can purchase their vested portion if allowed). This aligns the founder’s incentive to stay with the investors’ desire for continuity.

Founder shares in a cap table

Founder shares are the first line item in a company’s capitalization table. If two founders are granted 1 million shares each and a venture fund buys Series A preferred stock at a valuation that implies a 20 million share fully-diluted cap, the founders own 2/20 = 10% post-money (after dilution from the Series A and all the options that will be granted to employees).

As the company raises subsequent rounds (Series B, C, D, etc.), the founders’ percentage ownership dilutes further, unless they participate pro-rata in subsequent rounds. After many rounds of funding, founders often own only a few percent of the fully-diluted cap table, even though they own vastly more shares than any employee.

Protective provisions and super-voting shares

In later-stage startups and public companies, founder shares often carry protective provisions or super-voting rights:

• Protective provisions let the founder block certain actions (major asset sales, new equity issuances above a threshold, liquidation preferences).
• Dual-class voting gives each founder share 10 votes versus 1 vote per public share, preserving founder control even after the company is public.

These provisions protect founders from being displaced by subsequent investors or activist shareholders.

Founder stock and taxation

Founder shares granted at incorporation are typically granted at a nominal price (a few cents) but are subject to 83(b) elections in the US tax code. An 83(b) election lets the founder pay income tax on the full value of the grant upfront, at the nominal price paid, rather than over time as the shares vest. This has enormous tax benefits: if the founder files an 83(b) election and the shares later appreciate, the appreciation is taxed as a capital gain (lower rate) rather than ordinary income.

Without an 83(b) election, the founder pays ordinary income tax on each vesting batch at fair market value on the vesting date — potentially a much larger tax bill.

Founders who earn versus founders who are granted equity

Some founders earn their stakes from the beginning through sweat equity (as in early-stage bootstrapped startups). Others are granted equity by a board that includes investors (as in venture-backed startups). Venture capital investors typically insist that founders be subject to vesting to ensure alignment and prevent the scenario where a founder leaves after one year and keeps all their equity.

This practice is nearly universal in Silicon Valley and has spread globally, though some founders and investors resist it as unfair to the founder who created the company from nothing.

Founder liquidity and the long hold

Founder shares typically cannot be sold until after the company is acquired or goes public, at which point there is often a lock-up period during which the founder (like other insiders) is prohibited from selling. For founders who built a company over 10 years before acquisition, founder shares represent the vast majority of their wealth, and the lock-up — often 6 months post-IPO — is a critical moment.

Founder departures and unvested shares

When a founder departs, the board typically has a decision to make about whether to allow the founder to purchase their vested shares or to forfeit them entirely. Some boards are generous; others strict. This can be a source of conflict, especially in acrimonious departures.