Vesting Schedule
The timeline over which an employee earns the right to exercise stock options or receive equity grants, typically over four years.
A vesting schedule is the predefined timeline over which an employee progressively earns ownership rights to equity compensation awards — stock options, RSUs, or restricted stock. Vesting serves the dual purpose of incentivizing long-term retention (employees must stay to fully earn their equity) and protecting the company from granting equity to employees who leave early.
The industry-standard vesting schedule for technology startups is a 4-year vest with a 1-year cliff: the first 25% of the grant vests after 12 months of employment (the cliff), and the remaining 75% vests monthly or quarterly over the following 36 months. This structure is so standard that departing from it in either direction requires explanation to recruits and investors.
Vesting can be time-based (purely a function of continued employment), performance-based (tied to achievement of specific milestones — revenue targets, product launches, performance ratings), or a combination. Performance vesting is more common in executive compensation and public company plans.
Upon a merger or acquisition, vesting treatment is a critical negotiation point. Single-trigger acceleration provides full vesting upon a change of control alone. Double-trigger acceleration provides full vesting only if there is both a change of control AND the employee is subsequently terminated or constructively dismissed — the more employer-friendly standard.
For international employees, vesting schedules must comply with local labor laws. Some jurisdictions impose mandatory notice periods or severance that effectively alter the economics of forfeiture provisions.
FAQs
What happens to unvested equity when an employee leaves?
Unvested equity is typically forfeited when an employee leaves for any reason — resignation, termination, or retirement — unless the company's plan provides otherwise. Vested options must generally be exercised within 90 days of departure (the post-termination exercise period, or PTEP) or they expire; some companies have extended PTE periods of up to 10 years.
Can vesting schedules be accelerated?
Yes, through acceleration provisions in the grant agreement. Common triggers include single-trigger acceleration (change of control), double-trigger acceleration (change of control plus termination), or individual performance-based milestones. Acceleration can apply to 100% of unvested shares or a defined percentage.
What is back-vesting or reverse vesting?
Reverse vesting (common for founder shares) works opposite to typical vesting — shares are issued immediately but the company has a repurchase right over unvested shares. As time passes, the repurchase right expires (shares 'vest' free of repurchase). This enables founders to start with full economic ownership while still having retention incentives.
Related Terms
Cliff Vesting
A vesting provision where no equity vests until a minimum service period (the cliff) is completed, protecting against early departures.
Equity Compensation
Non-cash compensation in the form of company ownership interests, including stock options, RSUs, and restricted stock, used to attract and retain talent.
Cap Table
A spreadsheet or software record showing all equity ownership in a company, including shares, options, warrants, and convertible instruments.
SAFE Note
A Simple Agreement for Future Equity — a startup financing instrument that converts to equity at a future priced round, without accruing interest or setting a maturity date.
