Founder departures, vesting and cap table updates to keep your company diligence-ready

Establishing the Foundation: Founder Equity Vesting and Your Cap Table

A co-founder's departure is one of the most challenging moments for an early-stage startup. Beyond the personal and operational disruption, it's a critical financial event that puts your company’s legal and ownership structure to the test. Many teams overlook the precise, mechanical steps required for managing founder departures, leading to unclear equity ownership and significant problems during future fundraising. Answering the question of how to update a cap table after a founder leaves requires a disciplined process, not a frantic cleanup. Failing to properly handle this transition can stall due diligence, create investor doubt, and trigger co-founder disputes down the line. Getting this right protects the company and the remaining team, ensuring your ownership records remain clear and accurate.

Your capitalization table, or cap table, is the single source of truth for ownership in your company. It is not just an internal spreadsheet; it is the definitive legal record that tracks who owns what, from founders and employees to investors. To prevent future problems, the initial setup of founder equity must be handled with precision. This begins with vesting, a fundamental mechanism for aligning long-term commitment with ownership.

Founder equity vesting ensures that founders earn their ownership over a period of committed service. This protects the company by preventing a founder from leaving after a few months with a large, unearned portion of the company. A standard vesting schedule acts as a clear agreement on how equity is earned over time, safeguarding the interests of all stakeholders.

The 4-year vest with a 1-year cliff is the market expectation for most US-based, VC-backed startups.

This structure means a founder receives no equity for the first year of service, known as the cliff. After the first anniversary, 25% of their total shares vest. The remainder typically vests monthly or quarterly over the following three years, ensuring continuous alignment between the founder and the company's long-term success.

Tax Elections and Acceleration Clauses

For US-based companies, the tax implications of receiving stock are immediate and critical. A scenario we repeatedly see is confusion around tax filings, which can have costly consequences. An 83(b) election is a crucial filing that allows founders to pay income tax on their stock's value at the time of the grant, when its value is minimal. This must be handled correctly from day one.

An 83(b) election must be filed with the IRS within 30 days of receiving stock.

Failing to file within this strict 30-day window means the founder will be taxed on the stock’s fair market value as it vests, which could be substantially higher. For most pre-seed startups, this is a non-negotiable deadline. In the UK, the tax treatment is different. Founders might use structures like the Enterprise Management Incentive (EMI) scheme to receive tax-advantaged options, so local professional advice is essential.

Another foundational element is the acceleration clause, which defines what happens to unvested shares during an acquisition. Investors want to see founder incentives aligned for the long term, and the type of acceleration clause signals this commitment.

Investors strongly prefer double-trigger acceleration (change of control + termination) over single-trigger acceleration.

Single-trigger acceleration, where all unvested shares vest immediately upon an acquisition, can incentivize a premature sale. Double-trigger acceleration requires both an acquisition and a subsequent termination of the founder's employment without cause. This structure protects founders while ensuring they remain committed to a successful transition post-acquisition.

How to Update a Cap Table After a Founder Leaves: A Step-by-Step Guide

When a co-founder leaves, it is vital to separate the emotional process from the mechanical, contractual process. Your founder stock purchase agreements should grant the company the right to buy back any unvested equity at the original purchase price. This is a standard and crucial protection, not a hostile "clawback." It is simply the execution of a pre-agreed term designed to safeguard the company's equity pool for future contributors.

Upon a founder's departure, a company exercises its right to repurchase unvested shares at the original, low purchase price.

This step is what keeps the cap table clean. It ensures that equity is reserved for those actively building the company, rather than being held by individuals who are no longer contributing. Let's walk through an example to see how the equity ownership changes.

Example of an Equity Ownership Change

Consider a US-based SaaS startup with two founders. Each founder was issued 2,000,000 shares of common stock, purchased at a nominal price of $0.0001 per share. Their stock is subject to a standard 4-year vesting schedule with a 1-year cliff. One founder decides to leave 18 months after the company's incorporation. Here is the calculation:

• Total Shares Granted: 2,000,000
• Vesting Period: 48 months total
• Shares Vested at 1-Year Cliff: 25% of 2,000,000 = 500,000 shares
• Months Vested Post-Cliff: 6 months (18 total months of service minus 12 cliff months)
• Additional Shares Vested Monthly: (1/48th of 2,000,000 per month) x 6 months = 250,000 shares
• Total Vested Shares: 500,000 (cliff) + 250,000 (monthly) = 750,000 shares
• Unvested Shares to be Repurchased: 2,000,000 - 750,000 = 1,250,000 shares

The company will exercise its right to repurchase the 1,250,000 unvested shares at the original price of $0.0001 per share. The total payment to the departing founder for these shares is $125. The founder retains their 750,000 vested shares, and the company recovers the unvested portion.

The Formal Process for Updating Your Records

To execute this properly and maintain a clear audit trail, you must follow a formal legal and administrative process. Ad-hoc updates or verbal agreements are insufficient and create significant risk.

1. Review Agreements: First, locate the founder’s original Stock Purchase Agreement and any related shareholder agreements. Confirm the exact vesting schedule, repurchase rights, and purchase price.
2. Secure Board Consent: The company's board of directors must formally approve the share repurchase. This decision should be documented in a written board consent or through formal meeting minutes.
3. Execute a Repurchase Agreement: The company and the departing founder sign a simple agreement confirming the number of shares being repurchased, the price, and the final transaction details. This often includes a release of future claims.
4. Wire the Funds: The company pays the founder the nominal repurchase price. This transaction should be clearly recorded in your accounting software, whether you use QuickBooks, Xero, or another platform.
5. Update the Cap Table: This is the most critical step for record-keeping. In your spreadsheet or cap table platform like Carta or Pulley, update the founder’s entry to reflect their new, lower number of vested shares.
6. Update the Stock Ledger: The company’s official stock ledger, the formal legal record of share ownership, must also be amended to reflect the cancellation of the unvested shares.

After the repurchase, what happens to those recovered shares? This is a key strategic decision. The repurchased shares do not automatically go to the remaining founders. Instead, they become available for other uses.

Repurchased unvested shares typically return to the company's authorized but unissued pool.

From this pool, they can be re-issued to fund a new or expanded employee stock option pool, granted to a key executive hire who replaces the departing founder, or reserved for future investors.

The Payoff: Maintaining a Diligence-Ready Cap Table for Fundraising

Managing founder departures correctly is a key part of proactive cap table management, which is essential for fundraising. A messy, out-of-date cap table is one of the most common issues that stall due diligence. When investors ask for your cap table, they are looking for a document that is accurate, complete, and fully documented.

A "diligence-ready" cap table meets several key criteria:

• Accuracy: All share counts, vesting schedules, and ownership percentages are mathematically correct and sum to 100% of the fully diluted equity.
• Completeness: It includes every person and entity with a claim on the company’s equity, including common stock, preferred stock, options, warrants, and any convertible securities.
• Documentation: Every line item is supported by signed legal paperwork. This means a Stock Purchase Agreement for every founder, option grant paperwork for every employee, and board consents for every transaction.

Failing to maintain this standard creates red flags that investors quickly spot. Common issues include simple formula errors in a spreadsheet, missing 83(b) election forms, or evidence of a founder departure with no corresponding repurchase agreement or board consent. These issues do more than just slow down a deal. They signal poor operational discipline to potential investors, which can erode trust and negatively impact negotiations. A clean cap table demonstrates that you run a tight ship.

This is where moving from a spreadsheet to specialized software becomes valuable. While a spreadsheet in Google Sheets or Excel is sufficient for a two-founder company at the pre-seed stage, its limitations become apparent as you add employees and investors. Platforms like Carta or Pulley are designed to prevent common errors. They link every equity grant to its legal documentation, automate vesting calculations, and provide a clear, auditable history of all transactions. Using such a platform moves cap table management from a reactive cleanup exercise before a fundraise to a proactive, continuous process. It also allows you to easily build pro-forma cap tables to model fundraising scenarios. For more options, see a cap table software comparison.

Key Principles for Proactive Cap Table Management

Navigating founder equity and departures requires discipline from day one. The integrity of your cap table directly impacts your ability to raise capital and grow. To manage this effectively, focus on three core principles.

First, prioritize a proactive setup. Get the basics right from the beginning by implementing a market-standard vesting schedule, such as a 4-year term with a 1-year cliff. For US-based founders, filing the 83(b) election within 30 days is a critical, non-negotiable step. Document every equity grant with formal, signed agreements to create a clear legal record from the start.

Second, adopt a disciplined process for change. When managing a founder departure, treat it as a mechanical process governed by your legal agreements. Follow the checklist: review the agreement, get board consent, execute a repurchase agreement, wire the funds, and update your records immediately. This systematic approach prevents future disputes and legal ambiguity.

Finally, treat your cap table as the single source of truth for ownership. It is not a static document but a living record that must be updated in real time. Whether you use a meticulously maintained spreadsheet or a dedicated platform, keeping it diligence-ready at all times accelerates fundraising and prevents costly legal clean-up. This discipline is a hallmark of a well-run, fundable company.

Frequently Asked Questions

Q: What happens if a founder leaves before the 1-year vesting cliff?

A: If a founder leaves before the 1-year cliff, they typically depart with no vested equity. The company would exercise its right to repurchase 100% of their unvested shares at the original, low price. This is the primary function of the cliff: to ensure a minimum commitment period before any ownership is earned.

Q: Can the remaining founders take the repurchased shares from a departing founder?

A: No, the repurchased shares do not automatically go to the remaining founders. They return to the company's treasury as authorized but unissued shares. The board can then decide to re-issue them, often to fund an employee option pool or grant them to a new executive hire, subject to a new vesting schedule.

Q: Do we need a lawyer to handle the process of managing a founder departure?

A: Yes, it is highly recommended. While the process is mechanical, legal counsel ensures all documents, such as the board consent and repurchase agreement, are correctly executed and filed. This minimizes legal risk, protects the company, and ensures the cap table updates are legally sound and ready for investor due diligence.

Q: How does founder equity vesting differ for UK startups?

A: While the 4-year vest with a 1-year cliff is also common in the UK, the tax and legal structures are different. UK founders often use Enterprise Management Incentive (EMI) options, which offer significant tax advantages. The legal documentation and process for share repurchases must comply with UK company law, making local legal advice essential.