Vesting Schedule

Quick Definition

The timeline over which equity ownership is earned, typically 4 years with a 1-year cliff before any shares vest.

What is a Vesting Schedule?

A vesting schedule determines when equity actually becomes owned by the recipient. Stock options or restricted stock vest over time, meaning you earn ownership gradually rather than all at once.

The standard schedule is 4-year vesting with a 1-year cliff. Nothing vests for the first year (the cliff), then 25% vests at the 1-year mark, and the remainder vests monthly over the next 3 years.

Why Vesting Matters

Vesting protects companies from giving equity to people who leave early. If someone quits after 3 months with no vesting, they keep nothing. This aligns incentives for long-term commitment.

For founders, vesting protects against co-founder departures. If a co-founder leaves after 6 months, they shouldn't keep 50% of the company. Founder vesting ensures departing founders don't retain disproportionate equity.

Vesting Variations

• Cliff: Initial period before any vesting (typically 1 year).
• Acceleration: Faster vesting triggered by events (acquisition, termination).
• Refresh grants: Additional grants to retain employees.

Formula

• Cliff Vesting = Total Grant × (Cliff Period ÷ Total Vesting Period)
• Monthly Vesting (post-cliff) = (Total Grant - Cliff Amount) ÷ (Total Months - Cliff Months)

Example

Standard 4-year vesting with 1-year cliff:

• Total grant: 10,000 shares
• Year 1 (cliff): 0 shares vested until 12 months, then 2,500 vest
• Years 2-4: ~208 shares vest each month

If employee leaves at month 6: 0 shares
If employee leaves at month 18: 2,500 + (6 × 208) = 3,750 shares

Related Terms

Cliff (Vesting)

A waiting period before any equity vests, typically one year, protecting companies from early departures.

Exercise Price (Strike Price)

The price an option holder pays to convert options into shares, set at fair market value when granted.

Option Pool

A percentage of company equity reserved for future employee stock option grants, typically 10-20% of fully diluted shares.

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