Founders often underestimate equity allocation and handle it informally, only to face costly disputes when a co-founder departs or an investor requests a cap-table audit. At Koobiz, our experience confirms that well-structured equity is more than administrative: it underpins a startup’s longevity and attractiveness to investors. This guide outlines how to structure vested shares, covering standard vesting schedules, reverse vesting for founders, the necessary legal safeguards, and the Singapore IRAS tax implications.
What are Vested Shares in the context of a Singapore Startup?
Vested shares refer to equity that becomes fully owned only after a defined period of time or once certain milestones are met. In Singapore startups, vesting typically has several defining features:
- Conditional ownership: shares are not owned outright on day one. Instead, ownership is progressively earned, which clearly separates vested shares from shares that are merely granted at incorporation.
- Forfeiture Risks: until vesting is complete, shares remain subject to restrictions. If a founder or employee leaves early, any unvested shares are usually forfeited or bought back by the company at a nominal price.
- Long-term alignment: vesting ensures equity is awarded in exchange for ongoing contribution, not just future intent, aligning founders’ and employees’ incentives with the company’s long-term growth.
- Investor expectation: for Singapore-based Venture Capitalists (VCs), vesting is effectively non-negotiable. It provides legal assurance that key individuals are committed to the business, which is essential for a startup to be considered investable.
What are the standard vesting schedules for Startups?
A standard vesting schedule in Singapore and in most global startup ecosystems is built around two core elements: the cliff and the graded vesting period, typically spanning a total of four years.
Although startups are free to customise their own timelines (with some non-tech companies choosing a shorter three-year schedule), moving too far away from market norms can create friction when hiring talent or raising capital. The widely accepted benchmark remains four-year vesting with a one-year cliff, as it strikes a practical balance between protecting the company and fairly rewarding contributors. Below, we break down each component to explain why this structure has become the industry standard.
How does the “One-Year Cliff” Work?
A one-year cliff functions as an initial probation period during which no equity vests. If a founder or employee leaves within the first 12 months, they exit without any ownership.
In practice, the cliff acts as a safeguard for the company. Early-stage hires don’t always work out, and co-founder splits most often happen in the first year. Without a cliff, equity would start vesting from day one, allowing someone who leaves after only a few months to retain a permanent stake in the cap table — creating what is often referred to as “dead equity.” The cliff ensures shares are earned only after a full year of demonstrated contribution and commitment. Once the one-year mark is reached, it is standard for 25% of the total grant to vest immediately.
What is Graded Vesting (Monthly vs. Quarterly)?
Graded vesting refers to the gradual vesting of shares once the cliff period has been satisfied, usually on a monthly or quarterly basis for the remainder of the vesting term.
- After the one-year cliff, the remaining 75% of the equity typically vests progressively over the next three years (36 months).
- Monthly vesting: this is the most widely used structure. Shares vest in equal instalments of 1/48th per month, which employees tend to prefer as it provides steady progress and reduces “cliff-hanging” behaviour, where individuals delay resignation until a specific quarter-end.
- Quarterly vesting: shares vest once every three months. While this can be slightly easier to administer, it is increasingly uncommon in modern tech startups compared to a monthly schedule.
- In practice, Koobiz recommends monthly vesting after the cliff for most Singapore startups, as it aligns closely with global market standards and investor expectations.
Reverse vesting vs. Standard ESOP: Which strategy fits founders?
Reverse vesting is best suited for co-founders to lock in long-term commitment, while ESOPs are used to incentivise employees who join later. Clearly separating these two structures ensures equity is allocated to the right people in the right way.
| Feature | Reverse Vesting (Founders) | Standard ESOP (Employees) |
|---|---|---|
| Target Audience | Co-Founders & Key Partners | Employees, Advisors, Consultants |
| Ownership Status | Immediate: Founder owns shares from Day 1. | Future: Employee gets “options” to buy shares later. |
| Voting Rights | Yes: Voting rights start immediately. | No: No voting rights until options are exercised. |
| Vesting Mechanic | “Un-earning”: Company has right to buy back unvested shares. | “Earning”: Employee accrues right to buy shares over time. |
| Departure Impact | Company repurchases unvested shares. | Unvested options are cancelled/forfeited. |
Why is reverse vesting essential for Co-Founders?
Reverse vesting is critical for co-founders as it shields the company from the “free-rider” risk, situations where a departing founder retains a significant equity stake despite no longer contributing to the business.
Take a simple example: two founders agree on a 50–50 split. If Founder A exits after six months and no reverse vesting is in place, they still walk away with half of the company. Founder B is then left carrying the entire workload while owning only 50% of the upside, a structure that most investors will immediately flag as problematic. With reverse vesting, the company can exercise its buy-back rights over Founder A’s unvested shares often the full amount if the departure occurs before the cliff and return that equity to the company pool. This keeps the cap table clean and preserves flexibility to bring in a new co-founder or key hire.
Real-World Scenarios: Vesting in Action
To visualize how these mechanisms protect your company, let’s explore two common scenarios that Singapore startups face. These examples illustrate the financial impact of the “Cliff” and “Reverse Vesting” in real terms.
Case 1: The “Early Exit” Employee (Standard Vesting)
Scenario: You hire Alex as your CTO. You grant him a 1% equity stake (10,000 shares) on a standard 4-year vesting schedule with a 1-year cliff.
- Month 6: Alex struggles to adapt to the startup pace and resigns.
- Outcome: Because he has not reached the 1-year cliff, 0 shares have vested. He walks away with nothing, and the 10,000 shares return to the company pool for the next hire.
- Month 14: Alternatively, Alex performs well for a year but leaves in Month 14 to start his own business.
- Outcome: He has passed the cliff (12 months = 25% vested) and worked for 2 additional months.
- Calculation: 2,500 shares (Cliff) + 416 shares (2 months graded vesting) = 2,916 vested shares.
- Result: Alex keeps 2,916 shares. The remaining 7,084 unvested shares are forfeited/cancelled.
Case 2: The “Co-Founder Breakup” (Reverse Vesting)
Scenario: You and your co-founder, Sarah, start a company with a 50/50 split (500,000 shares each). You wisely sign a Shareholders’ Agreement with Reverse Vesting terms.
- The Situation: Sarah decides to leave the project after just 9 months to pursue a corporate job.
- Without Reverse Vesting: Sarah would walk away owning 50% of the company (500,000 shares) despite quitting early. You would be left doing all the work for half the reward, making your startup “dead” to investors.
- With Reverse Vesting:
- Since Sarah left before the 1-year cliff, 0% of her shares are vested.
- Action: The company exercises its right to buy back all 500,000 shares at the nominal price (e.g., S$1.00 total). Note: This nominal price must be explicitly defined in your Shareholders’ Agreement (SHA) to prevent legal disputes regarding fair value.
- Result: You regain control of the equity, which can now be used to find a new co-founder who is committed for the long haul.
Do you need a shareholders’ agreement to enforce vesting?
Yes, a properly drafted Shareholders’ Agreement (SHA) is essential to enforce vesting arrangements, as these provisions are rarely addressed in a company’s standard Constitution.
Many founders setting up in Singapore assume that an email exchange or the default ACRA Constitution will be enough. This is a risky misunderstanding. While the Constitution governs high-level corporate matters, the SHA is the binding private contract that defines how shareholders interact with one another. Without an SHA that clearly sets out vesting schedules, what constitutes “Cause” for termination, and the mechanics and pricing of share buybacks, there is no legal basis to compel a departing shareholder to surrender their shares.
Although generic founder vesting templates for Singapore are easy to find online, using off-the-shelf documents for something as fundamental as equity can expose the company to serious risk. At Koobiz, our legal team drafts tailored, investor-ready SHAs designed to protect your cap table from the outset.
Handling Departures: Good Leaver vs. Bad Leaver Provisions
Leaver provisions are contractual clauses categorized into “Good Leaver” and “Bad Leaver” scenarios, set out the terms – including pricing – under which the company may repurchase vested shares from a departing shareholder..
In practice, the reason for departure is critical. These provisions ensure that someone dismissed for misconduct or fraud is not treated the same as an individual who exits due to redundancy or restructuring. Clearly defining these distinctions in the Shareholders’ Agreement is essential to preserve fairness among shareholders and safeguard the company’s valuation.
What constitutes a “Bad Leaver” in Singapore Law?
A “Bad Leaver” is generally a shareholder who exits due to serious misconduct, fraud, breach of contractual obligations, or voluntarily leaving to join a direct competitor.
Because these scenarios are meant to deter harmful behaviour, the consequences are typically strict. Under common Singapore legal drafting, a Bad Leaver will immediately forfeit any unvested shares. In addition, the company often has the right to repurchase vested shares at a nominal price (for example, S$1 in total) or at the lower of fair market value and the original subscription price. Importantly, Bad Leaver definitions may also capture breaches of non-compete obligations, provided those restrictions are reasonable and enforceable under Singapore law.
How are vested shares treated for “Good Leavers”?
A “Good Leaver” generally refers to a shareholder who exits for reasons outside their control, such as death, permanent disability, or termination without cause, including redundancy.
In contrast to Bad Leavers, Good Leavers are treated more favourably. They usually retain their vested shares, or where the company elects to repurchase them, the buy-back is carried out at Fair Market Value. This approach ensures that individuals who have made genuine contributions are not financially disadvantaged by circumstances beyond their control.
What happens to vested shares during an exit or acquisition?
Vesting schedules commonly incorporate acceleration clauses that apply in liquidity events, enabling shares to vest ahead of the original timeline when the company is sold or acquired.
These provisions protect both founders and employees by ensuring they participate in the upside of an exit they helped build, even if the standard four-year vesting period has not yet been fully completed. Acceleration generally falls into two categories: Single Trigger and Double Trigger.
Single Trigger vs. Double Trigger Acceleration
Single Trigger acceleration allows shares to vest immediately upon the sale of the company, whereas Double Trigger acceleration requires both the sale of the company AND the termination of the employee within a set period.
- Single Trigger: Favorable to employees. If the company is sold in Year 2, all remaining shares vest instantly. Investors often dislike this as it can cause a mass exodus of talent immediately after acquisition.
- Double Trigger: The industry standard. Unvested shares only accelerate if the company is acquired (Trigger 1) AND the new owner fires the employee or creates constructive dismissal (Trigger 2). This aligns the interests of the acquirer (retention) and the employee (job security).
Are Vested Shares Taxable in Singapore?
Generally, the grant of options or shares is not taxable at the point of grant, but gains from Employee Share Option Plans (ESOP) are taxable when the shares vest or are exercised, depending on the specific plan structure.
Singapore’s tax regime is attractive, but it is strict regarding employment income. Understanding the nuances between founder equity and employee options is vital to avoid penalties.
Tax Treatment: Founders vs. Employees
For founders whose shares are subject to reverse vesting, equity is usually issued at incorporation at a nominal price. As the shares vest, there is typically no tax implication where the holdings are treated as a capital investment, since Singapore does not impose capital gains tax.
The tax treatment for employees under ESOPs is different. The spread between the shares’ open market value and the exercise price paid is generally regarded as employment income and is therefore taxable. Employers are required to declare these gains to IRAS through Form IR8A. Certain schemes, such as the Qualified Employee Equity-Based Remuneration Scheme (QEEBRS) or Startup Tax Exemption (STE), may provide relief or deferral, although eligibility is subject to strict conditions.
The “Tax Clearance” Process for Foreign Employees (Deemed Exercise)
The Deemed Exercise rule is an IRAS requirement that applies to non-Singapore citizen employees who leave Singapore or change employment, obliging them to be taxed on unvested equity as though it had vested immediately before their departure.
This rule is a common compliance pitfall for foreign employees and is often referred to as ESOP tax clearance for expatriates. When a foreign employee holding unvested options resigns or relocates overseas, the employer must submit Form IR21 (Notification of a Non-Citizen Employee’s Cessation of Employment or Departure from Singapore) to obtain tax clearance. IRAS will then assess the unvested equity at its prevailing market value and impose tax on the deemed gain upfront. This mechanism allows Singapore to tax income earned during the individual’s period of employment in the country. Koobiz’s tax team supports companies through these IRAS filings to ensure full compliance for international staff.
Frequently Asked Questions (FAQ)
Can I use a 3-year vesting schedule instead of 4?
Yes, while 4 years is the global standard for tech startups, 3-year schedules are occasionally used in other industries. However, a shorter schedule may be less attractive to investors who want to ensure long-term commitment.
What happens if I don’t have a Shareholders’ Agreement?
Without an SHA, you rely on the standard Company Constitution, which rarely includes vesting or “bad leaver” provisions. This means you likely cannot force a departing founder to give up their shares, potentially leaving dead equity on your cap table.
Is the “cliff” always one year?
Typically, yes. However, for late-stage hires or advisors, the cliff might be shorter (e.g., 3 or 6 months), or waived entirely if the individual has already been working informally for a significant period.
Does Singapore tax capital gains on shares?
Generally, no. Singapore does not have a capital gains tax. However, if you are deemed to be trading shares for profit (e.g., frequent buying and selling), IRAS may treat gains as income.
Disclaimer
The information provided in this guide is for general informational purposes only and does not constitute legal, tax, or professional advice. Laws and regulations in Singapore, including IRAS tax rules, are subject to change. You should consult with a qualified legal or tax professional before making any decisions regarding your company’s equity structure.
Structuring your startup’s equity is a foundational step that dictates your future governance and financial health. From setting the right cliffs to drafting watertight Bad Leaver clauses, every detail matters.
Koobiz is your trusted partner in Singapore for corporate services. Beyond just incorporating your company, we assist with drafting Shareholders’ Agreements, Corporate Secretarial services, and navigating IRAS tax compliance for your equity plans.
Ensure your startup is built on solid ground. Contact Koobiz today to structure your vested shares correctly from day one.
