3 Common Vesting Schedules for Startups

Companies give founders and employees stock options as a form of equity compensation. When an employee “exercises” their option, they purchase some or all of the shares subject to the option. Before they can do so, however, their options must survive the “vesting period.”

A vesting period is a period of time that that must pass before the option holder owns a property right in the options or, in other words, before the option holder can exercise his or her option by purchasing company shares. Companies set the vesting period according to a vesting schedule, which is often based on the passage of time and an employee’s years of service. Alternatively, the vesting schedule can also be based on the employee’s completion of certain deliverables, or the company reaching certain milestones.

Graded vs. Cliff Vesting

Generally, there are two types of vesting schedules—a graded vesting schedule and a cliff vesting schedule. A graded vesting schedule gradually vests over time.  A cliff vesting schedule gives an employee full ownership after a certain period of time passes. Typically, a cliff vesting schedule is easier to administer, since equity vests all at the same time. The one to three-year cliff means you must be employed by the company for one full year before your options begin to vest. This is to encourage employee loyalty and retention.

3 Common Vesting Schedules

Below are common vesting schedules used for founder and employee equity.

Vesting Schedule #1: Three Year Cliff

Years of Service Vested %
1 0%
2 0%
3 100%

Vesting Schedule #2: 4 Year Graded

Years of Service Vested %
1 25%
2 50%
3 75%
4 100%

Vesting Schedule #3: 5 Year Graded

Years of Service Vested %
1 20%
2 40%
3 60%
4 80%
5 100%

Tips about Founders’ Equity

  • Companies often give founders credit up front (rather than waiting a year before their options vest).
  • Founders may also receive retroactive credit based on how long they spent working before incorporation.

Establishing an equity plan for founders and employees is a useful, rewarding, and complex business tool. Feel free to reach out to us for a more customized description for your business’ needs.

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