Vesting
A schedule by which ownership of shares or options is earned over time, typically four years with a one-year cliff.
Vesting is the process by which a person gradually earns full ownership of their shares or options over a specified period. The standard startup vesting schedule is four years with a one-year cliff: nothing vests for the first 12 months, then 25% vests at the one-year mark, and the remainder vests monthly or quarterly over the next three years.
Vesting exists to align incentives and protect the company. If a co-founder leaves after three months, vesting ensures they do not walk away with a large equity stake they did not earn. Similarly, employee option grants vest over time to encourage retention. Without vesting, early departures could leave significant equity in the hands of people who are no longer contributing.
Founder vesting is just as important as employee vesting. Most investors require founders to have vesting schedules, even if the founders started the company years ago. This is because investors are betting on the team staying together, and vesting provides a financial incentive to do so. Some founders negotiate "credit" for time already served, starting their vesting clock with some portion already vested.
Example
A startup grants an engineer 40,000 stock options with a standard 4-year vesting schedule and 1-year cliff. After 12 months, 10,000 options vest at the cliff. Then 833 options vest each month for the next 36 months. If the engineer leaves after 2.5 years, they have vested 25,000 options and forfeit the remaining 15,000.
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