1. What Is a Cliff?
2. Pulling the Trigger
3. The Benefits of Setting up a Vesting Scheme

Vesting schedule startup is an important term that those founding a business will need to know. Vesting occurs when a company founder gets their full amount of stock at one time. This can allow them to avoid capital gains tax and also provides the company with the ability to buy back the founder's interest in the event they walk away from the company.

In a vesting scheme, employees and members will benefit from the company's success, though the business will be protected if they walk away. This process will always involve creating a vesting schedule that provides a determination of when the employee will gain full ownership of a specified asset. It also includes how much stock the business will be able to buy back in the event of the employee's departure.

Vesting is used to protect founders and provides those employed by the company with the common goal of driving the business toward success. When creating a vesting schedule, there are some important things to remember.

  • A vesting clause will usually last four years and include a one-year cliff.
  • The longer you stay, the larger the percentage of equity will be, with full vesting occurring at 48 months.
  • Each week, you will be earning 1/48th of the equity total you will vest.
  • With a cliff in place, if the founder walks away in less than a year, they will lose all equity.

What Is a Cliff?

The cliff usually occurs after the first year. An example of a cliff in a vesting schedule is a company that starts to gain some traction in their second year of business. The company has the equity divided up as 35 percent you, 35 percent your partner, and 30 percent to the angel investor. If the partner were to walk away at this juncture, they would receive 17.5 percent or half of the equity, since they have completed half of the 48 months.

The other 17.5 percent of equity is repurchased back to the company from the partner at their departure. When you start a corporation, you will begin with a set number of shares, and they will be distributed to investors based on what percentage they own of the company. In the above example, the 17.5 percent of the partner's equity that goes back to the company will be represented by lowering the total number of shares that represent the ownership of the company. This in effect makes the other shareholders larger owners of the company.

Pulling the Trigger

There is the chance that a company can be acquired before the founders have become fully vested in the company. When this occurs, your vesting becomes accelerated. There are two ways this acceleration can occur: single trigger and double trigger.

  • Single trigger: A single trigger acceleration will accelerate between 25 and 100 percent of your unvested shares once the company is acquired. If you achieve 100 percent vesting through this, then your vesting period will not be changed.
  • Double trigger: This type of acceleration occurs when a company is acquired at the same time your employment is terminated.

The Benefits of Setting up a Vesting Scheme

Vesting schemes are created to protect founders of a business. Many founders work hard to get a company going, and if one of the founders leaves halfway through the period of vesting, they get 50 percent of the ownership while the remaining partner is left to pick up the pieces. This means the founder that leaves will get to benefit from the other founder's continued labor. By setting up a proper vesting scheme, you may be able to ensure a founder cannot leave with everything until the vesting scheme has been completed.

Vesting schemes are also an incentive for employees. Employees are not only part of the company payroll, but they will also be entitled to reap the benefits of the business. This can create an incentive to push the business to success.

You may also want to create a vesting scheme to protect yourself from having others walk out on your business. It is important to trust your team when starting a new company, but sometimes issues can come up that require people to walk away from a business. Having a vesting scheme is vital to protecting your new business.

If you need help with a vesting schedule startup, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.