Vesting: Earning Your Equity Over Time

Vesting is a critical concept in equity compensation, especially for startup employees and founders. Think of it as earning your shares over time, rather than receiving them all at once. It’s a way for companies to incentivize employees to stay and contribute to long-term success. It also protects the company if an employee leaves shortly after joining.

How Vesting Works:

Vesting typically follows a predetermined schedule outlined in your stock option agreement or grant documentation. This schedule dictates when you gain ownership of a portion of your granted shares or options. A common vesting schedule is “four-year vesting with a one-year cliff.”

• Cliff: This refers to the initial period before any shares or options vest. In the example above, the one-year cliff means you don’t own any of the granted equity until you’ve worked for the company for a full year. After that year, a portion (often 25%) of the total grant vests.
• Vesting Period: This is the time period over which the remaining shares or options become yours. In our example, it’s the remaining three years after the cliff. The remaining 75% of the equity vests gradually over those three years, often monthly or quarterly.

Example Vesting Schedule (Illustrative):

Imagine you are granted 4,000 stock options with a four-year vesting period and a one-year cliff.

• Year 1: 0 options vest (due to the cliff)
• Year 2: 1,000 options vest (25% of the total)
• Years 3-4: 750 options vest each year (the remaining 75% over three years), broken down into smaller amounts monthly or quarterly

Why Vesting Matters:

• For Employees: Vesting ensures that you gradually earn ownership in the company, rewarding your long-term contribution.
• For Companies: Vesting protects the company’s equity by preventing early departures from taking a large chunk of ownership. It encourages employees to commit and contribute to the company’s success.

Different Types of Vesting:

While the example above describes time-based vesting (the most common type), other types exist:

• Performance-Based Vesting: Vesting is tied to achieving specific company milestones.
• Milestone Vesting: Vesting occurs upon reaching certain individual or company goals.

Key Terms Related to Vesting:

• Vesting Schedule: The timeline for earning your equity. Learn More: Vesting Schedule
• Cliff: The initial period before any vesting occurs. Learn More: Cliff Vesting
• Grant Date: The date the equity was awarded to you. Learn More: Grant_Date

Common Questions about Vesting:

• What happens to my unvested shares if I leave the company? (Generally, you forfeit them.)
• Can the vesting schedule be changed? (It’s possible, but usually requires agreement from both the company and the employee).
• Where can I find my vesting schedule details? (Your stock option agreement or your company’s HR department.)

So here’s what we covered:

• Definition of vesting and how it works.
• Example of a typical vesting schedule.
• Importance of vesting for both employees and companies.
• Different types of vesting.
• Key terms related to vesting.
• Common questions about vesting.