Founder Vesting in Pakistan: Making Reverse Vesting Actually Work

A founder walks out of a Karachi startup eighteen months in, holding thirty per cent. The remaining founders pull out their downloaded vesting schedule, point to the clause saying his unvested shares are "repurchased by the company at par," and discover that the sentence describes something their company may have no lawful way to do. That story is a composite, altered from several matters — but the problem at its centre is real, recurring, and avoidable. This briefing sets out the position as the law stands in July 2026.

The gap in the imported mechanic

Reverse vesting means the founder receives all shares on day one but earns the right to keep them over time; leave early, and the unearned portion goes back. In a Delaware corporation the "goes back" step is simple: the company exercises a contractual repurchase right and cancels or holds the stock. The whole schedule rests on the company's broad freedom to buy its own shares.

Pakistani company law does not hand you that freedom. The Companies Act, 2017 treats a company's purchase of its own shares as an exceptional event, permitted only through narrow statutory routes with conditions attached, and the routes realistically available to a private company are constrained enough that no vesting scheme should be built on them [BUY-BACK PROVISIONS OF THE COMPANIES ACT 2017 AND THEIR APPLICATION TO PRIVATE COMPANIES — TO BE VERIFIED BY REVIEWING LAWYER]. Nor does the Act offer forfeiture as a substitute: forfeiture under the articles is tied to unpaid calls on shares, not to a founder's failure to stay employed. And once shares are entered against a founder's name in the register of members, the Act protects that entry. There is no provision anywhere in the statute that takes shares away from a member because the member stopped working.

So the American clause fails at both ends. The company cannot reliably repurchase, and the register will not un-write itself. If the departing founder declines to cooperate, the remaining founders hold a piece of paper describing a transaction the law will not perform automatically.

Rebuilding the mechanic as a transfer obligation

The version that works in Pakistan routes around the company entirely. Instead of a company repurchase, the founders' agreement imposes a personal obligation on each founder: on departure before full vesting, the founder must transfer the unvested shares to the continuing founders (or to a nominee they designate) at a pre-agreed price. That is an ordinary contract between shareholders, enforceable under the Contract Act, 1872, and it asks nothing of the company except registration of a transfer — a routine act the Companies Act, 2017 already provides for.

Three design consequences follow. First, the buyers must be identified in advance. "To the company" does not work for the reasons above; "to the other founders pro rata, or as they direct" does, and it should permit designation of a later trust or holding vehicle. Second, the price must be a formula, not a negotiation. A common structure prices unvested shares at the lower of subscription price and fair value for a bad leaver, and at fair value by an agreed method for a good leaver — with both terms defined exhaustively, because every departing founder self-classifies as good. Third, the clause must survive the founder's exit from employment: draft it as attaching to the founder as shareholder under the founders' agreement, not as a term of an employment contract that ends on resignation.

One caution on pricing: a transfer at a punitive undervalue, triggered by breach, can be attacked as a penalty. Section 74 of the Contract Act, 1872 limits recovery for breach to reasonable compensation even where a sum is named. A bad-leaver price that operates as a forfeiture-by-another-name invites that argument [TREATMENT OF LEAVER PRICING UNDER SECTION 74 — TO BE VERIFIED BY REVIEWING LAWYER]. The safer characterisation is that the founder never earned the shares commercially and agreed a call option from the outset, exercisable at a set price — an allocation of rights, not a punishment for breach.

Making the transfer self-executing

A transfer obligation is only as good as your ability to complete it against a hostile counterparty, and a share transfer in a Pakistani company needs the transferor's participation: a duly executed and stamped instrument of transfer delivered to the company under the Companies Act, 2017. The drafting task is to collect that participation in advance.

The standard toolkit has three pieces. Pre-signed transfer instruments: each founder executes undated transfer forms at signing, covering the maximum unvested portion, held by an escrow agent named in the agreement with written release instructions tied to the schedule. A power of attorney: each founder authorises the others (or the escrow agent) to execute transfer documents if they fail to act; because the power protects the grantees' own interest in the shares, draft it as an agency coupled with interest, which section 202 of the Contract Act, 1872 makes irrevocable without the agents' consent. And articles alignment: the articles should oblige the board to register transfers made under the mechanism, so the directors' refusal power standard in private company articles cannot be turned against the scheme by whoever controls the board that day.

Stamping is not optional housekeeping. The transfer instruments attract stamp duty under the applicable provincial stamp law descended from the Stamp Act, 1899, and the founders' agreement itself is an instrument that should be stamped at execution; section 35 of the Stamp Act, 1899 makes an unstamped instrument inadmissible in evidence until the duty and penalty are paid — a delay you will be handed at the worst possible moment [PROVINCIAL RATES ON SHARE TRANSFERS AND AGREEMENTS — TO BE VERIFIED BY REVIEWING LAWYER].

If it still ends in a dispute

Even a well-built mechanism sometimes gets litigated. A claim to compel transfer of shares in a private company is a strong candidate for specific performance under the Specific Relief Act, 1877, because unlisted shares have no market substitute and damages are inadequate — which is why the contractual record matters: the court enforces the machinery you built, not the machinery you meant to build. Most founders' agreements route disputes to arbitration, which for a domestic seat proceeds under the Arbitration Act, 1940 as of July 2026 [STATUS OF PENDING ARBITRATION REFORM — TO BE VERIFIED BY REVIEWING LAWYER]; if you choose it, confirm interim relief to preserve the shares is available and say where it will be sought. Whatever the forum, the escrow structure does the real work: it converts the dispute from "compel my ex-partner to sign" into "direct the escrow agent to release" — a materially easier case. For how vesting fits into the wider founder documentation, see our overview of founders' agreements under Pakistani law, and for the corporate work around it, our startup law practice.

The vesting-clause checklist

Before any founder signs, verify every item below against the actual drafts — not the term sheet summary.

• The mechanic is a founder-to-founder (or founder-to-nominee) transfer obligation; nothing depends on a company buy-back under the Companies Act, 2017.
• The schedule states cliff, vesting frequency, total period, and what happens to the fractional balance on a trigger date.
• Good leaver and bad leaver are defined by exhaustive lists, with a default rule for cases falling outside both.
• The price for each leaver category is a formula computable by an accountant without either founder's cooperation, and the valuation referee is named.
• Acceleration is addressed expressly: on exit or acquisition (single or double trigger), on death or incapacity, and on termination of the founder without cause.
• Pre-signed, stamped transfer instruments covering the maximum unvested portion sit with a named escrow agent under written release instructions.
• Each founder has granted an irrevocable power of attorney, drafted to fall within section 202 of the Contract Act, 1872, for execution of transfer paperwork.
• The articles oblige registration of scheme transfers and have actually been amended by special resolution — check the filed version, not the draft.
• The agreement and the transfer instruments are stamped under the applicable provincial stamp law at execution.
• The dispute clause names a seat, rules, and an interim-relief route capable of freezing the disputed shares.

What this means for you

If your vesting clause says the company will repurchase unvested shares, treat it as unwritten and rebuild it as a transfer obligation between founders with escrowed, pre-signed instruments behind it. If you are past incorporation with no vesting at all, the same structure can be adopted now by agreement — every founder should want it, since it protects each from everyone else's early exit. If a co-founder has already left with dead equity on the register, the options are negotiation, properly authorised dilution, or restructuring — all slower and costlier than the clause would have been. Vesting in Pakistan is not a template you download; it is machinery you assemble, before you need it.