What is a vesting schedule for startup equity?

A vesting schedule determines when founders and employees earn full ownership of their equity shares over time, typically spanning 3-4 years with a one-year cliff.

A vesting schedule is a timeline that determines when startup founders, employees, or advisors gain full legal ownership of their allocated equity shares. Rather than receiving all shares immediately, equity "vests" or becomes fully owned over a predetermined period, typically 3-4 years.

The most common structure includes a "cliff" period, usually one year, during which no shares vest. After the cliff, shares typically vest monthly or quarterly. For example, with a 4-year vesting schedule and 1-year cliff, 25% of shares vest after year one, then the remaining 75% vests monthly over the subsequent 36 months.

Vesting protects companies from situations where team members leave early but retain large equity stakes. It ensures that equity is earned through continued contribution and commitment. For founders, vesting demonstrates commitment to investors and prevents one founder from walking away with significant ownership after minimal contribution.

Different types exist: time-based vesting (most common), performance-based vesting tied to milestones, and hybrid models. Acceleration provisions may allow faster vesting upon certain events like company sale or involuntary termination.

Unvested shares typically return to the company's option pool when someone leaves, allowing redistribution to new team members. Lauren De Brauwer from Mace notes that properly structured vesting schedules are essential for maintaining team motivation and protecting company interests.

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