Vesting Schedule: Decoding Your Grant

A vesting schedule determines when you actually own the equity (stock options or restricted stock units) granted to you by your company. Think of it as earning your slice of the pie over time. It incentivizes you to stay and contribute to the company’s success. It also protects the company by ensuring that equity isn’t immediately given to someone who leaves shortly after joining.

Key takeaway: Your vesting schedule outlines how and when you earn the right to your equity compensation, typically over a period of years.

How Vesting Works

Vesting usually happens gradually over a set period, called the vesting period, often four years. A common schedule is four-year vesting with a one-year cliff. Let’s break that down:

• Vesting Period: The total timeframe over which you earn your equity.
• Cliff: A period at the beginning of your employment where no equity vests. In a one-year cliff, you earn nothing until you’ve worked for one year. After that year, a portion of your equity (usually 25% in a four-year vesting schedule) immediately vests.
• Vesting Increments: After the cliff, the remaining equity typically vests at regular intervals, such as monthly or quarterly, over the remainder of the vesting period. In our example, after the one-year cliff and initial 25% vest, you’d vest the remaining 75% over the next three years, likely in monthly or quarterly increments.

Example: Imagine you’re granted 4,000 stock options. With a four-year vesting schedule and a one-year cliff:

• Year 1: You vest 0 shares.
• End of Year 1: 1,000 shares (25%) vest (this is the cliff).
• Years 2-4: The remaining 3,000 shares vest gradually (e.g., 250 shares each quarter for three years, assuming quarterly vesting).

Different Vesting Schedules

While four years with a one-year cliff is common, other schedules exist. Some startups offer shorter or longer vesting periods, and the cliff can vary too. Always review your specific grant agreement.

Why Vesting Matters for Secondary Sales

Your vesting schedule directly impacts how many shares you can sell on the secondary market. You can typically only sell shares that have already vested. Learn More: Selling Your Shares with Earlyasset

Understanding Your Own Vesting Schedule

Your company should provide you with a document detailing your equity grant, including the vesting schedule. If you have questions, contact your company’s HR or legal team for clarification. Don’t hesitate to reach out – understanding your equity is essential. Learn More: Understanding Your Stock Options: ISO vs NSO

So here’s what we covered:

• Definition of a vesting schedule.
• How vesting works, including vesting periods, cliffs, and increments.
• An example of a typical vesting schedule.
• Different types of vesting schedules.
• Why vesting matters for secondary sales.
• How to find your personal vesting schedule information.