Key Takeaways

  • An equity vesting schedule determines when equity grants (like stock or options) become fully owned by recipients.
  • Common vesting types include cliff, graded, and immediate schedules, each with different timelines and structures.
  • Standard startup equity schedules often follow a four-year vesting period with a one-year cliff.
  • Equity vesting protects founders and investors from early departures and misalignment.
  • Special clauses like acceleration can alter vesting schedules during events like acquisition or termination.
  • Custom vesting schedules can be tailored to key hires or company strategies.
  • Legal and tax implications can vary significantly and should be reviewed with professional guidance.

Vesting equity is when you claim or assign future earnings, assets, or payments. It is often used by employees in lieu of stocks or options from their employers. For example, vesting equity could come in the form of retirement plan benefits for employees.

After working for several years, an employee will have rights to specific employer-provided assets, providing an incentive to stay with the organization. The longer an employee is at an organization, the more non-forfeitable rights than accrue.

Why Vesting Is a Good Idea

Vesting is more than just a fallback for employees. It also helps entrepreneurs protect their assets in times of disagreement.

For example, pretend you have an idea and want to start a company with a co-founder. Things are going great, until your partner decides to leave the venture unexpectedly. Instead of shutting things down, you continue to go it alone, eventually building up your company to the point where it's worth $300 million. You decide to cash out and sell.

Suddenly, your old partner contacts you and claims he deserves 50 percent of the sale price. Unfortunately, unless you developed a vesting system, he may be entitled to it.

When you start a company with a partner, you're both automatically 100-percent vested. Unless you took advantage of this and purchased his share of equity when he left the company, you may have to pay up when you sell the company. Otherwise, he would no longer have any right to profits earned from the sale of the company.

Types of Vesting

There are three main types of vesting:

  1. Immediate vesting — In this system, employees are 100-percent vested as soon as they start working for the company. This system is rarely used.
  2. Cliff vesting — In this system, employees get 100 percent of their equity at one time, but it isn't as soon as they start. Instead, it will be after a certain number of years of service.
  3. Graded vesting — In this system, employees get their equity in small increments over a longer period of time. This is the most popular system, as it gives employees motivation to stay until they are 100-percent vested.

Vesting Period Examples

There's no set timeline for any specific type of vesting. Instead, it's up to employers to determine their schedules. 

One typical approach is to use a four-year vest period. This approach gives employees retention grants after they've been employed for two years. Overall, this approach is good because no employee is ever more than half vested on his or her equity. For example, if you earned up to 50-percent equity and decide to leave after four years, you will only be able to maintain 25 percent.

In this system, your equity vests on a yearly basis. This means that if you decide to quit before reaching a full year, you will not have any equity. If you quit a year and a day after your work anniversary, you'll have one fourth of your total vestment.

Other employers enjoy using a three-year vest period. This lets them give employees retention grants when they are fully vested.

If your employer offers various vesting options, the most important thing to consider is the number of options or stock that you can vest every year. Obviously, the size of the grant is crucial, but it's not the most important factor. You should look most closely at your equity-based compensation amount.

Vesting Acceleration and Triggers

Vesting acceleration allows unvested shares to become partially or fully vested before the original schedule due to specific events. Common types include:

  • Single-trigger acceleration: Automatically accelerates vesting if a specific event occurs, such as a company acquisition.
  • Double-trigger acceleration: Requires two conditions—usually a change of control (like acquisition) and termination without cause—to activate early vesting.

Startups often use double-trigger acceleration to balance founder protection with buyer expectations in M&A deals. Understanding how these clauses work is critical for both employees and founders negotiating equity packages.

Common Equity Vesting Schedules Explained

The most common equity vesting schedule in startups is a four-year schedule with a one-year cliff. This means:

  • Cliff period: No equity is vested until the employee completes one full year of service.
  • Post-cliff vesting: After the cliff, 25% of equity vests at once, and the remaining 75% vests monthly or quarterly over the next three years.

Other common vesting schedules include:

  • Three-year graded vesting: Vesting occurs in equal installments (e.g., 1/36th per month).
  • Five-year vesting schedules: Less common, but can incentivize long-term leadership stability.
  • Custom hybrid schedules: These may front-load a portion of the equity (e.g., 40% in the first two years) and then stretch the rest, often used to attract executive hires.

Employers may choose different timelines or acceleration clauses to align with funding milestones, retention goals, or industry standards.

Vesting in Wills

Workplaces aren't the only place where vesting is common. They also occur frequently in wills and bequests. Often, people use vesting to initiate a waiting period after death so that arguments and other issues can be settled.

Sometimes, heirs get into feuds over who should inherit what. Even worse is what happens if the heirs die along with the original testator.

The waiting period allows these matters to be settled, so everyone inherits what is rightfully theirs.

Vesting and Startup Companies

Vesting works a little differently when it comes to startup companies.

Often, employees will have the choice of common stock or a stock-option plan as part of their initial compensation packages.

Because turnover might be high at a startup, companies generally create a vesting period so that employees cannot sell their equity for a certain amount of time.

Tips for Implementing a Fair Equity Vesting Schedule

To create a vesting structure that balances retention and fairness, companies should consider the following tips:

  • Align vesting with company goals: Tailor schedules to encourage long-term commitment and performance.
  • Standardize where possible: Use templates for similar roles to ensure internal consistency and avoid resentment.
  • Disclose vesting terms clearly: Employees should understand how and when their equity vests, including how termination, leaves of absence, or IPOs affect their schedule.
  • Consult legal and tax professionals: Vesting can trigger tax implications like ordinary income or capital gains, depending on structure and timing.

Clear documentation and proactive communication can help avoid disputes and legal complications down the line.

Customizing an Equity Vesting Schedule

While standard vesting schedules are common, companies may opt for customized vesting structures to better match business goals. Factors that influence customization include:

  • Seniority or role: Key executives might receive shorter cliffs or front-loaded vesting.
  • Performance milestones: Equity may vest only after achieving revenue or product development targets.
  • Time-based vs. milestone-based: Some agreements use a hybrid of time and event-driven vesting, especially in high-growth startups or venture-backed firms.

For example, a technical co-founder might have a different vesting structure from a sales executive brought in later to scale operations. Customization helps companies remain competitive in talent acquisition while managing equity dilution carefully.

Frequently Asked Questions

  1. What is an equity vesting schedule?
    An equity vesting schedule outlines the timeline over which an individual gains ownership of equity, such as stock options or shares.
  2. What is a standard vesting schedule in startups?
    The most common startup equity schedule is four years with a one-year cliff, followed by monthly or quarterly vesting.
  3. What happens to unvested shares when an employee leaves?
    Unvested shares are typically forfeited unless otherwise specified in an agreement (e.g., with acceleration clauses).
  4. Can vesting schedules be customized?
    Yes, companies often customize vesting schedules for key employees or founders based on strategic goals, milestones, or funding rounds.
  5. What is a vesting cliff?
    A cliff is a period at the start of a vesting schedule during which no equity vests. After the cliff ends, a large portion (e.g., 25%) may vest all at once.

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