A vesting schedule doles out equity grants over time, or according to project milestones. The purpose of a vesting schedule is to incentivize employees to stick with their employer, by gradually sweetening the equity incentives over time. An employee doesn’t fully own her stock until it vests.1
One common vesting scenario for startup employees is “4 years with a 1-year cliff.” This means that 1/4 of your equity grant will vest after your first full year with the employer, and after that, it 1/12 will vest after each additional 3 month period you stay with the employer.
You don’t need to agree to just a vesting schedule just because it’s commonly used. Faster or slower schedules may be appropriate, depending on the circumstances. Sometimes, you may want to negotiate a vesting schedule that’s based on project milestones, especially with outside contractors. You may even want to back-weight the vesting schedule, so less equity vests in early years, and more vests in later years.
“Vesting periods are not standard but I prefer a four year vest with a retention grant after two years of service. That way no employee is more than half vested on their entire equity position.” MBA Mondays - Employee Equity: Vesting. By Fred Wilson, 2010.
Accelerating the Vesting Schedule
Founders and early employees may be able to negotiate for an “acceleration” clause - a clause that shortens the vesting period under certain conditions.
- “Acceleration” generally refers to automatic vesting upon a merger or acquisition of the company. This is favorable to the employee, but the acquiring company will not be happy if all of the key employees vest and vanish soon after the acquisition.
- “Double-Trigger Acceleration” refers to automatic vesting upon both (i) a merger and (ii) the new company firing the employee. This should be less objectionable to startups and acquiring companies because it still incentives employees to stay with the new company after a merger.
You do technically own stock subject to vesting, but the company has a contractual right to buy it back from you for cheap, and vesting is really the schedule of when this repurchase right expires. ↩