Equity Vesting Schedules: What You Need to Know

Equity vesting is a critical mechanism that determines when and how equity holders can actually own their shares. Understanding vesting schedules is essential for both founders and employees in startup companies.

What is Equity Vesting?

Equity vesting is the process by which an equity holder earns the right to keep their shares over time. It prevents people from leaving the company immediately after receiving equity grants and taking their shares with them.

Common Vesting Schedules

1. Four-Year Vesting with One-Year Cliff

• Most common structure for both founders and employees
• 25% vests after one year (cliff period)
• Remaining 75% vests monthly over the next three years
• Total vesting period: 4 years

2. Immediate Vesting

• All shares vest immediately upon grant
• Rare for employees, sometimes used for founders
• High risk if person leaves early

3. Milestone-Based Vesting

• Vesting tied to performance goals or company milestones
• Common for advisors or consultants
• Can be combined with time-based vesting

Key Vesting Terms

Cliff Period

• Minimum time before any shares vest
• Typically 1 year for employees and founders
• Protects company from early departures
• All-or-nothing: if you leave before cliff, you get zero shares

Acceleration

• Single-trigger: vesting accelerates upon company sale/merger
• Double-trigger: requires both sale AND termination
• Full vs. partial acceleration

Vesting Commencement Date

• When vesting clock starts ticking
• Usually the grant date or start date
• Important for early employees

Best Practices

For Founders:

1. All founders should have vesting schedules
2. Consider longer cliff periods (12-18 months)
3. Include acceleration provisions for key events
4. Document everything properly

For Employees:

1. Understand your vesting schedule before accepting offers
2. Negotiate acceleration if possible
3. Consider tax implications of early exercise
4. Keep track of vesting dates

Use our Equity Compensation Calculator to model different vesting scenarios and understand the value of your equity over time.