Founder vesting in Ontario corporations: what happens to the company if a co-founder leaves in Year One.

Why founder shares should vest

Two founders incorporate. Each receives 50% of the shares. They have done the work to get to incorporation: the idea, the early conversations, the registration. The equity reflects the work to date. The work going forward is the bigger work: building the product, getting the first customers, hiring the team, raising capital, running the company through its first several years.

A founder who leaves in Year One has done a small fraction of the work. The shares were tied notionally to the future contribution as well as the past. Without vesting, the equity stays. The company carries a passive shareholder with a 50% stake and no operating contribution, while the remaining founder does ten years of work to grow the company and the departed founder collects the same share of the outcome.

Vesting fixes the imbalance. The shares are issued on incorporation but vest over time as the founder performs. A founder who leaves before vesting completes leaves the unvested shares behind, typically forfeited to the company or repurchased at a nominal price, exactly the mechanism the forfeiture clause spells out. The remaining founder, and any future investors or hires, see a clean cap table that reflects the actual operating contributions.

The standard four-year vesting schedule with a one-year cliff.

The convention borrowed from US startup practice and now common in Ontario tech and growth corporations: founder shares vest monthly over four years, with a one-year cliff, the same structure covered in the founder vesting checklist.

• Year One, the cliff. No shares vest until the founder has been with the company for twelve months. On the twelve-month anniversary, 25% of the shares vest in one event. Founders who leave before the twelve-month mark forfeit all of their notionally-issued shares.
• Years Two through Four, monthly vesting. After the cliff, shares vest in equal monthly increments. With a 36-month vesting period after the cliff, that is roughly 2.08% of the original grant per month. A founder who leaves at month 30 vests 25% (the cliff) plus 18 months at 2.08%, or 62.5% total.
• Full vesting at four years. All shares fully vested. The founder owns the equity outright with no further vesting conditions.

The four-year, one-year-cliff structure is a convention, not a requirement. Two-founder Ontario corporations sometimes use three years, sometimes shorter cliffs (six months), sometimes no cliff. The structure should match the realistic timeline over which the founders need to be present for the company's success.

What happens when a founder leaves before vesting completes.

The vesting agreement defines the consequences of departure. Three categories matter.

1. Voluntary departure or termination for cause.

Unvested shares are forfeited or repurchased by the company at a nominal price (often $0.0001 per share). The departing founder keeps only the vested portion. The forfeited shares typically return to the company's authorized but unissued pool, where they can be reissued to a replacement co-founder or set aside for the employee option pool.

2. Termination without cause by the company.

Some vesting agreements include single-trigger acceleration: a portion of the unvested shares vest immediately on termination without cause. The acceleration protects the founder against an opportunistic termination by the other founder before vesting completes.

3. Death or disability.

Usually treated as accelerated vesting events, often with full acceleration so the founder's estate or the founder personally retains the full equity. The shareholders agreement and the vesting agreement should align on the trigger events and the acceleration mechanics.

The buy-back price for forfeited unvested shares should be defined in advance. A nominal price close to zero is the common convention because the unvested shares were never operationally earned. Some agreements use the original issue price, which can become meaningful if the founder paid real money for the shares at issuance.

What to put in writing at incorporation.

Vesting is structured through a separate vesting agreement signed by each founder, referenced in the shareholders agreement. At incorporation, decide the following.

• The vesting period. Four years is conventional; three years is common in faster-cycle businesses; longer can be appropriate where the work requires longer founder commitment.
• The cliff. Twelve months is conventional. A shorter cliff (six months) reduces the founder's downside on early departure but also reduces the protection for the company.
• The departure consequences. Define what happens to unvested shares on voluntary departure, termination for cause, termination without cause, death, and disability, and the buy-back price for any forfeited shares.
• The acceleration triggers. Single-trigger acceleration (one event vests a defined portion) or double-trigger acceleration (two events required, often used for change-of-control protections).
• The interaction with the shareholders agreement. Reserved-matter consent rights, deadlock resolution mechanisms, and exit provisions should all reference the vested portion of shares, not the originally-issued portion.

DRG Law structures founder vesting for Ontario two-founder corporations, drafts the vesting agreements, and integrates the vesting mechanics with the shareholders agreement.