Options and restricted stock in a startup are subject to vesting. This is done to associate the rewards of equity ownership with the time and effort put into creating value for the company.
Although vesting schedules can be infinitely flexible in theory, in practice they don’t vary that much. You’ll find that the majority of option plans and restricted stock agreements are identical in meaning and vary slightly with how vesting is structured. Most vesting schedules have the following parameters:
- Vesting period. This is the expected period for full vesting. It is typically 4 years (48mos) in the case of employees and 3 or 4 years in the case of founders. Some have argued that vesting periods should be extended to 5 years because it often takes longer to build a significant company these days but they are a minority. Advisors and other non-standard roles can have 12 or 24 month vesting periods. Sometimes the negotiations over the vesting period of founders can get pretty contentious. When I started in venture I used to see more 3 year vesting schedules and then the market moved to 4 years while preserving founders’ acceleration as described below. Another variation you’ll sometimes see is quarterly as opposed to monthly vesting. I think this is a terrible idea. Like the cliff, which is described below, any discontinuities in the vesting schedule create an environment for incentives misalignment.
- Starting acceleration. This is done to reward people involved in the founding of a company. Founders typically get 25% vesting acceleration but sometimes this can be more, e.g., if the founders bootstrapped the company for a significant period of time.
- Cliff. The cliff is the hurdle one needs to cross before vesting begins. You are unlikely to see cliffs in a plan with starting acceleration–founders don’t have cliffs in the their vesting schedules. It is common for employees to have a 12month cliff. If the vesting period is 48 months and the cliff is a year this means that no vesting will happen