Vesting in startups is a common practice for both founders and employees. It refers to the process of earning ownership over a certain period of time, usually through stock options or restricted stock units (RSUs). Vesting provides motivation and incentives for employees to stay with the company long-term, as they will only receive their full ownership stake after a set amount of time.
For example, if an employee is granted 1,000 shares of stock that vest over four years with a one-year cliff, they will not receive any ownership until one year has passed. Then, on each anniversary date thereafter (monthly or annually), they will earn an additional portion of the shares until they have reached 100% ownership after four years.
The “cliff” in this scenario means that if the employee leaves before one year has passed, they will not receive any ownership at all. This is intended to prevent people from joining a startup just to get some free equity and then leaving shortly thereafter.
Vesting schedules can vary widely depending on the company’s size and stage of growth. A startup that is just starting out may offer shorter vesting periods, while more established companies may offer longer periods in order to retain top talent.
It’s important for employees to carefully review their vesting agreements before accepting a job offer. They should pay attention to details such as how much equity they are being offered, what percentage vests each year or month, whether there is a cliff period, and any other terms or conditions attached to their equity package.
Founders also need to consider their own vesting schedules when starting a new company. It’s common practice for co-founders to agree on equal ownership stakes but with staggered vesting schedules so that everyone has an incentive to stay involved in the business long-term.
In addition to providing incentives for employees and founders alike, vesting can also protect investors by ensuring that key team members remain committed even if things don’t go according to plan. If a startup fails, investors may lose their money, but at least they won’t have to worry about key employees leaving with valuable equity before the company winds down.
However, vesting can also create some potential problems if not managed properly. For example, it can create tension between early and later-stage employees who may feel that they are not being fairly compensated for their contributions. It can also lead to disagreements over how much equity each person deserves in the event of an acquisition or IPO.
Overall, vesting is an important tool for startups to attract and retain top talent while also protecting investor interests. By carefully considering the terms of their agreements and regularly communicating with team members about ownership stakes and expectations, companies can avoid potential pitfalls and build a strong foundation for long-term success.