Vesting Schedules

Vesting Schedules defined: A vesting schedule is a schedule detailing the time frame and the extent to which stock options (or restricted stock, or similar equity grants) become owned by the recipient (and may therefore be exercised or sold). For startup employee equity, a typical vesting schedule consists of a 4 year vesting with a “1 year cliff.” If a company founder raises venture capital funding, the venture capitalists may also require a founder or founders to also put part of their pre-existing shareholdings on a vesting schedule as well, to ensure they remain with the company.

Employee Vesting Example: For example, if an employee joins a company in 2011 with 4,800 stock options. During the first 12 months, the employee does not vest any of his stock options (because there is a “1 year cliff” first). Once the employee hits the 1 year mark of employment, he receives 1/4th of his stock options (in this example, 1,200 stock options), which are deemed fully vested. (So that if the employee then leaves the company, he or she will have kept those 1,200 stock options.) After the 1 year cliff is reached, the employee will then typically vest additional shares or stock options monthly (in this example, the employee vests an additional 100 stock options for beginning in month 13 and each month thereafter until all 4,800 stock options are vested after 4 years.

Founder Vesting Example: A founder holds 100,000 shares of her startup. 2 years later, she raises $1 million from a venture capital firm, issuing them 50,000 new shares of the company. In order to keep the Founder tied to the company, the venture capital firm requires that she vest half of her stock holdings (50,000 shares) on a new 5 year schedule. In this example, 1 year after the venture capital round, the Founder will have vested and owns 60,000 shares of the company’s stock (50,000 she was allowed to keep as vested upon receiving VC funding, plus 1/5th of the balance, or 10,000 more shares). If the Founder leaves or is fired by the VCs at that point (3 years after the company’s founding) she will leave with 60,000 shares fully vested, with the remaining 40,000 shares given up.

Above is a definition for “Vesting Schedules” from PrivCo’s Private Company Knowledge Bank, the definitive online and e-book guide to private companies and private company deals.

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