Vesting
Vesting is the process by which an employee or founder earns full ownership of benefits — typically stock options, equity, or retirement contributions — over a set period of time. Until shares or benefits are fully vested, you don't completely own them. If you leave before vesting completes, you for
Vesting Definition
Vesting is the process by which an employee or founder earns full ownership of benefits — typically stock options, equity, or retirement contributions — over a set period of time. Until shares or benefits are fully vested, you don't completely own them. If you leave before vesting completes, you forfeit the unvested portion.
Vesting in Practice — Example
A startup offers a new VP of Sales 1% equity with a standard 4-year vesting schedule and a 1-year cliff. After the first year (the cliff), 25% of her shares vest at once. After that, the remaining 75% vest monthly over the next 3 years. If she leaves after 2.5 years, she owns 62.5% of her equity grant. The rest goes back to the company's option pool.
Why Vesting Matters for Your Business
If you're offering equity to attract talent — which many startups and growing businesses do — understanding vesting is essential. A well-designed vesting schedule protects the company from someone joining, getting a large equity grant, and leaving immediately.
For employees and founders, vesting aligns incentives. You earn your ownership stake by contributing to the company over time. This creates retention incentives and ensures everyone at the table has skin in the game.
Vesting also matters in co-founder relationships. Without vesting, a co-founder who leaves after three months could walk away with 50% of the company. Founder vesting (with reasonable terms) protects all parties and is often required by investors.
How Vesting Works
| Term | Definition |
|---|---|
| Vesting Schedule | The timeline over which equity/benefits fully vest (usually 4 years) |
| Cliff | A minimum period before any vesting occurs (usually 1 year) |
| Acceleration | Faster vesting triggered by events (acquisition, termination) |
| Single Trigger | Acceleration on one event (e.g., acquisition) |
| Double Trigger | Acceleration requires two events (e.g., acquisition + termination) |
After the cliff, vesting typically occurs monthly or quarterly. Some companies use back-weighted schedules (more vesting in later years) to further incentivize retention.
Vesting vs Granting
Granting is the act of awarding equity or options — it's the promise. Vesting is the process of earning that grant over time. On day one, you're granted 10,000 shares; after four years of vesting, you own all 10,000. The grant creates the right; vesting fulfills it.
FAQ
Q: What happens to unvested shares if I'm fired?
A: Typically, unvested shares are forfeited. However, some agreements include acceleration clauses that vest some or all shares upon involuntary termination. Check your equity agreement carefully.
Q: Should founders have vesting schedules?
A: Yes — it protects all co-founders and is usually required by investors. A common setup is 4-year vesting with a 1-year cliff, sometimes with credit for time already worked before the formal agreement.
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