⚖️ Understanding Vesting

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Practical Information - What is Vesting and How Does It Work?

Vesting is a process where employees, founders, and advisors earn their shares or options over time, rather than receiving them all upfront. In a typical vesting schedule, shares are granted but only become fully owned after a certain period, often four years, with a one-year "cliff." The cliff means that if the individual leaves before one year, they don’t receive any shares, but after the first year, they might vest 25%, with the remaining shares vesting monthly or quarterly over the next three years. This structure ensures that the shares are earned through continued contribution to the company’s growth.

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Why Vesting is Common for Early-Stage Hires and Key Advisors

Vesting is particularly common for early-stage hires and key advisors because it aligns their interests with the long-term success of the company. It provides an incentive for them to stay with the company and contribute over time, rather than leaving after receiving a large equity grant. For founders, vesting can also protect against the risk of a co-founder or early employee leaving the company early with a significant share of equity. By tying equity to continued involvement, vesting ensures that those who help build the company are the ones who benefit from its success.

Ensuring Fairness and Protecting the Company

Vesting schedules also help startups manage equity distribution more fairly. If a key hire or advisor leaves the company early, the unvested shares can be reallocated to new hires or retained within the company for future use. This prevents the dilution of equity among those who are no longer contributing to the company’s growth. For these reasons, vesting is a standard practice in the startup world, ensuring that equity is distributed in a way that supports the company's long-term success while protecting both founders and employees.

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