Dead shares

Dead shares are shares held by people who no longer contribute, or never contributed, to the company, typically founders or employees who left while keeping their shares. By contrast, investor shares are never considered dead, even in the face of total passivity on their part.

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This risk is structurally prevented through two complementary mechanisms: Vesting, which conditions final ownership of shares on continued presence over time, and purchase options, which let the company buy back the unvested shares of a departing holder, following a logic close to Reverse vesting.

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The absence of these mechanisms at incorporation is one of the costliest mistakes young founders make: a co-founder who leaves the project after a few months with no vesting clause keeps the entirety of their initial shares, with no further contribution, which permanently dilutes the remaining founders and complicates every subsequent financing round, as new investors routinely question the presence of such dead shares on the Cap table.

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For an investor assessing a startup, dead shares sitting on the Cap table with no buy-back mechanism provided for in the shareholders' agreement is a red flag in financial due diligence: they structurally dilute the proceeds of a future exit with no corresponding contribution.