Vesting Shares. Why Every Health Tech Startup Founder Needs Them in Their Shareholders Agreement
Imagine this. Eighteen months into building your health tech startup, your co-founder walks out and walks away with 50% of the company. They contribute nothing further while you grind through clinical validation, TGA approval and fundraising. Without vesting shares in your founders' shareholders agreement, that scenario is entirely legal. This article explains what vesting shares are, why they matter so much for health tech founders, and what a well-drafted vesting clause should cover.
What Are Vesting Shares?
Vesting shares are shares a founder or employee earns over time or on hitting agreed milestones, rather than owning outright from day one. In founder arrangements, this is usually structured as “reverse vesting” where the founder holds their full shareholding from the start, but the company has the right to buy back any unvested shares, typically at a nominal price if the founder leaves early.
A typical founder vesting schedule runs over four years with a one-year “cliff” where 25% of shares vest on the first anniversary, and the balance vests in equal monthly tranches over the following 36 months. Leave before the cliff and you keep nothing. Stay the course and you earn your full stake.
Why Vesting Matters More in Health Tech
Every startup benefits from founder vesting, but the case is stronger in health tech for three reasons.
(1) Long development timelines
Regulatory approval (TGA), clinical evidence and procurement cycles mean health tech companies may take longer to reach revenue. Vesting keeps founders committed through that long haul, and milestone-based vesting can be tied to regulatory wins as well as time served.
(2) Scarce, specialised talent.
Health tech demands rare combinations of clinical and technical expertise. Vesting for founders and employees alike is one of the most powerful retention tools available in a competitive talent market.
(3) Investor expectations.
Venture investors in health tech almost universally expect founder shares to be subject to vesting before they commit capital. Founders who arrive at a pre-seed or seed round with vesting already in place negotiate from a stronger, more credible position.
What Your Founders' Shareholders Agreement Should Include
Vesting only works if it is properly documented. A robust founders' shareholders agreement should set out:
A clear vesting schedule, the standard four-year schedule with a one-year cliff, with precise vesting dates and tranche calculations.
Good leaver / bad leaver provisions where a departing founder dismissed for misconduct (bad leaver) is treated differently from one who leaves through illness or agreed exit (good leaver), including the price the company pays for their shares.
Buy-back rights over unvested shares where the company’s right to acquire unvested shares at a nominal price when a founder leaves, exercisable within a defined window.
Acceleration on change of control, that is, whether unvested shares vest automatically if the company is sold, so committed founders are not penalised in an exit.
Milestone-based vesting (optional) in health tech, tranches can be tied to regulatory approvals, clinical trial outcomes or revenue targets in addition to time.
IP protection by ensuring a founder who leaves before fully vesting does not walk away with rights to the company’s most valuable asset.
The Risks of Getting It Wrong
Founders who skip vesting, or document it poorly, face predictable problems, that is, dead equity held by departed co-founders that distorts the cap table and deters investors, unexpected immediate tax liabilities and costly disputes, because courts scrutinise the precise wording of equity documents when founders fall out. Ambiguous drafting is an invitation to litigation at exactly the moment your company can least afford it.
Key Takeaways
Vesting shares are earned over time and they protect the company and the founders who stay.
Health tech’s long timelines, scarce talent and investor expectations make founder vesting essential, not optional.
Properly structured vesting may unlock tax concessions for startups.
Your founders’ shareholders agreement should cover the schedule, leaver provisions, buy-back rights, acceleration and IP.
If you are founding a health tech company or have already issued founder shares without vesting, speak to a startup lawyer before your next funding round. Getting the agreement right at the start is far cheaper than untangling a founder dispute later.
