Founder Refresh Equity in Later VC Rounds

New options, secondary liquidity and retention equity when founders remain essential after several financing rounds

After several successful investment rounds, founders may still be essential to the company. They carry the product vision, investor trust, customer relationships, technical know-how and team culture. But by that stage they may also have been diluted significantly.

That creates a practical question in a new financing round: should the founders receive new economic upside to keep them committed?

The answer is often yes, but not as a simple gift of extra shares. In later-stage VC rounds, founder refresh equity, option grants, milestone-based incentives or limited secondary liquidity can be used to realign incentives. The key is to structure the package as a retention and value-creation tool, not as compensation for past dilution.

For Dutch companies, this is also a legal implementation question. New founder incentives must fit the cap table, shareholders’ agreement, articles of association, option plan, leaver provisions and, where shares are issued or transferred, Dutch notarial mechanics.

This article connects to Dutch Venture Capital Insights, US VC Terms & Dutch BV Structures and Founder Vesting After Year Four.

Why founder refresh becomes relevant

Founder refresh usually becomes relevant when the company has made real progress, but the exit or scale-up phase is still ahead.

The founders may have built the company, raised multiple rounds and absorbed substantial dilution. New investors still see them as critical to the next phase. Existing investors also want them to remain motivated, because losing key founders before the company reaches maturity can damage value.

This is not an anti-dilution right for founders. Investors are not usually trying to undo all previous dilution. The question is more specific: do the active founders still have enough upside to justify the risk, effort and opportunity cost of continuing?

If the answer is no, the round may include a founder retention package.

What can founders receive?

The most common solution is a new option or equity grant. This can be granted through an option pool or a specific founder refresh plan. The grant usually vests over time and may be linked to continued service, performance milestones or the next financing or exit event.

A second solution is milestone-based equity. Instead of giving founders immediate additional economics, the company grants additional upside if agreed targets are met. These targets may relate to revenue, product development, regulatory approval, profitability, fundraising or exit preparation.

A third solution is limited secondary liquidity. In that case, investors buy a small portion of founder shares, allowing founders to take some money off the table. This can reduce personal financial pressure while keeping the founders meaningfully invested. It is not the same as issuing new shares to founders, but it can be part of the same retention discussion.

A fourth solution is a phantom share or SAR-style arrangement. This can create economic upside without immediately changing the shareholder base. It may be useful where the cap table is already complex or where direct equity is not the best route.

In some growth-stage situations, a more structured management incentive plan may be used. That is closer to private equity practice and should be carefully aligned with the existing VC documentation.

The main negotiation point: who bears the dilution?

The most sensitive issue is dilution.

If a new option pool or founder refresh pool is created before the financing, the dilution may effectively be borne by the existing shareholders. If it is created after the financing, the new investor may share in the dilution. The term sheet should say clearly whether the pool is included in the pre-money or post-money capitalization.

This is not just a mathematical point. It determines who pays for the retention package.

Founders will argue that investors benefit from founder retention and should share the dilution. Investors will argue that the pool is part of the company’s operating needs and should be reflected in the pre-money valuation. The final outcome depends on leverage, company performance, founder importance and investor appetite.

Vesting and leaver terms are essential

Founder refresh equity should normally be subject to vesting. If the goal is retention, the economics should be earned through continued involvement or future milestones.

The documentation should also say what happens if a founder leaves. Is the founder a good leaver, bad leaver or intermediate leaver? What happens to vested and unvested refresh equity? Can the company repurchase the shares or options? Does a departure before an exit or next round affect the grant?

Without clear leaver terms, the refresh package may create a new dead equity problem.

In a Dutch BV structure, these arrangements should be coordinated with the shareholders’ agreement, option plan, articles of association and any transfer restrictions.

Dutch BV implementation

For a Dutch company, the legal form matters.

An option grant may be contractual at first, but the issuance or transfer of Dutch BV shares will usually require Dutch corporate approvals and notarial execution. Existing shareholders may have pre-emption rights or consent rights. The articles of association and shareholders’ agreement may need to be reviewed or amended.

The documentation should also address tax, valuation, employment or management status, vesting, leaver provisions, transfer restrictions and investor consent. Granting shares or options at an undervalue may have tax consequences and should not be treated as a purely commercial cap table adjustment.

The practical document set may include the term sheet, investment agreement, shareholders’ agreement, option plan, founder retention agreement, board and shareholder resolutions, waiver of pre-emption rights and notarial deed.

Practical conclusion

Founder refresh equity can be appropriate when founders remain essential after several financing rounds and their existing equity no longer gives sufficient forward-looking incentive.

The right question is not whether founders “deserve” compensation for dilution. The better question is whether the company’s future value depends on keeping them motivated and aligned.

For Dutch startups and scale-ups, the structure should be built carefully: amount, dilution, vesting, milestones, leaver treatment, tax, shareholder approvals and notarial implementation should all be addressed before the new round closes.

FAQ

Is it common for founders to receive new equity in a later VC round?
It can be, especially where founders have been significantly diluted but remain essential to the company’s future value. It is usually structured as retention equity, options, milestone equity or secondary liquidity.

Is founder refresh equity the same as anti-dilution protection?
No. Anti-dilution protects against valuation-based dilution. Founder refresh equity is usually a forward-looking incentive to keep key founders committed.

Can founders receive cash instead of equity?
Sometimes. Limited secondary liquidity may allow founders to sell a small portion of shares. Cash bonuses are also possible, but equity or option-based incentives usually align better with VC value creation.

Should founder refresh equity vest?
Usually yes. If the purpose is retention, the additional economics should be linked to continued involvement or agreed milestones.

Does a Dutch notary need to be involved?
If Dutch BV shares are issued or transferred, a Dutch notarial deed will usually be required. Option grants may be contractual, but the eventual share issuance or transfer must be implemented correctly.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, startups, scale-ups and investors on Dutch venture capital rounds, founder incentives, cap table structuring, option plans, shareholders’ agreements and Dutch BV implementation.

ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.

Need to structure founder refresh equity?

Founder refresh equity should align founders and investors before the next phase of growth. It should not create unclear dilution, tax risk or future dead equity.

Dirk de Waard advises Dutch startups, founders and investors on founder refresh grants, option pools, secondary liquidity and Dutch BV implementation in financing rounds. Contact Dirk at dirk.dewaard@viottalaw.com to discuss the structure before the round closes.