What is reverse vesting?

Founders hold their shares from day one, and the company can buy back a portion of them at no or nominal cost if a founder leaves before a set period. Each period of continuous service frees more shares from that right.

What vesting schedule is standard for founders?

Y Combinator describes four years with a one-year cliff as typical. In Israel, reverse vesting on founder shares usually runs two to four years, with three years common, according to Herzog Fox & Neeman.

How are reverse-vested founder shares taxed in Israel?

Under the Israel Tax Authority 2017 circular, the sale of reverse-vested founder shares can be taxed as a capital gain when conditions are met, such as a written arrangement made at or shortly after incorporation and a buy-back right held only by the company or existing shareholders at no or nominal cost. Check your case with a lawyer and an accountant.

When should co-founders sign a founders agreement?

As early as possible, ideally when you decide to build together and before any outside investment. It is easier to agree while there is still little at stake.

Co-Founder Agreement in Israel: Equity Split, Vesting and What to Include (2026), Velo Labs

Q: What should a founders agreement include?

The equity split, reverse vesting on founder shares, roles and time commitment, how decisions are made and deadlocks broken, assignment of IP to the company, share transfer rules, confidentiality and non-compete, and what happens when a founder leaves.

The short answer: sign a founders agreement before you take outside money, ideally as soon as you decide to build together. It should cover the equity split, reverse vesting on founder shares, roles, how decisions are made and deadlocks broken, assignment of IP to the company, and what happens when a founder leaves. A common structure is reverse vesting over three to four years with a one-year cliff. In Israel, the tax treatment of reverse-vested shares depends on how the arrangement is set up, so agree the structure with a lawyer and an accountant.

The agreement is the written version of the conversations we recommend in choosing a co-founder. Founders who sign it while they still agree on everything get the best version of it.

What a founders agreement should cover

Clause	What it settles	Common approach
Equity split	Who owns what, and why	Reflects expected contribution, past and future, in quality and time
Reverse vesting	What a founder keeps if they leave early	Founder shares vest over time of continuous service; the company can buy back unvested shares at no or nominal cost
Roles and time commitment	Who is CEO, who owns what, full-time from when	Written roles, with any phased commitment tied to milestones such as a first investment
Decisions and deadlock	How the founders decide, and what happens when they cannot	Board composition, decisions that need unanimity, a deadlock mechanism
IP assignment	That the company owns what the founders built	All founder IP, including work done before incorporation, assigned to the company
Share transfers	Who can sell, and to whom	Lock-up, right of first refusal, co-sale, pre-emptive rights
Leaver terms	What happens when a founder leaves	Unvested shares bought back; good-leaver and bad-leaver distinctions
Confidentiality and non-compete	Protecting the company if someone leaves	Reasonable in time and scope to be enforceable

The equity split

There is no formula that fits every team. A split should reflect what each founder is expected to contribute from here, as well as what they already brought, and it should be one that every founder would still defend in two years. Equal splits are common and avoid a hard conversation, but they are only right when the commitment really is equal. If someone is joining part-time, or later, or in a narrower role, that belongs in the split or in the vesting terms.

If someone helped in the very early days without becoming a founder, settle their claim in writing now. Open claims from early helpers are a classic problem in due diligence.

Reverse vesting: the clause that protects everyone

Founders usually hold their shares from day one. Reverse vesting means the company can buy back a portion of those shares, at no or nominal cost, if a founder leaves before a set period. Each month or quarter of continuous service, more of the shares become free of that right.

It protects the founders who stay. Without it, a co-founder who leaves after six months can keep a large stake while the others carry the company. Investors will almost always ask for it before a round, so it is better to set terms you chose yourselves. Y Combinator describes four years of vesting with a one-year cliff as typical. Israeli law firm Herzog Fox & Neeman notes that reverse vesting usually runs two to four years, with three years common for founders, that not all of a founder's equity is always subject to it, and that on an acquisition, acceleration of unvested shares is often expected, with some investors pushing for double-trigger acceleration instead.

Founders who started earlier sometimes receive part of their shares already vested, as credit for time already put in.

The Israeli tax point

The Israel Tax Authority addressed reverse vesting in a circular published in June 2017, after a 2016 draft. In summary, the sale of reverse-vested founder shares can be taxed as a capital gain, at 25% (30% for a controlling shareholder), rather than as employment income at rates of up to 50%, when conditions are met: the arrangement was set in advance and in writing at incorporation or close to it (or at a significant investment of at least 5%), only the company or the other shareholders can buy back forfeited shares, for no or nominal consideration, and the shares are ordinary shares with the same rights as the other ordinary shares. Treatment depends on the facts of each case, and the position should be checked with your advisors when you set the agreement up.

Option grants to employees and officers are a separate topic, usually made under Section 102 of the Income Tax Ordinance, which is not available to controlling shareholders, generally holders of 10% or more. Read more in our guide on how much equity to give advisors, studios and accelerators.

Decisions and deadlock

Two founders with equal shares and equal votes have no built-in way to break a tie. Decide in advance which decisions belong to the CEO, which need both founders, and what happens in a true deadlock, for example an agreed advisor or board member who decides, or a defined process for buying out a founder. This is the clause founders least want to write and most often need.

IP: make sure the company owns the product

Everything the founders built before and after incorporation, including code, designs and domain names, should be assigned to the company. Check whether any founder still works for an employer, or has worked with a university, hospital or government body, that might have a claim on the work. Investors will check this in due diligence.

When a founder leaves

Leaver terms decide what happens to unvested and vested shares when a founder leaves. Many agreements distinguish a good leaver, for example because of illness or by agreement, from a bad leaver, for example after a breach. Write down how each case is handled, and what happens to the departing founder's board seat and role.

Practical checklist

Sign early.Before outside money, and while you all still agree.
Use a lawyer who works with startups.The agreement has to work with your articles and with your first investment documents.
Model the cap table.See what each founder owns after a pre-seed SAFE and a seed round with our SAFE and dilution calculator.
Revisit before the round.Investment documents often replace parts of the founders agreement. Keep it flexible enough to adapt.

This guide is general information and is not legal or tax advice. Every company's situation is different, so agree the details with your lawyer and accountant.

The co-founder agreement in Israel: what to include