Vesting
A vesting schedule outlines the timeline and conditions under which equity ownership is earned. It typically includes a cliff period, which is a specified period of time that must pass before any equity is vested, and a subsequent vesting period during which equity gradually becomes available. For example, a common vesting schedule might have a one-year cliff period followed by monthly vesting over the course of three additional years.
Vesting serves several purposes. It incentivises individuals to remain with the company for the long term, as they need to fulfil the vesting requirements to fully benefit from their equity. It aligns the interests of the individual with those of the company by linking ownership rights to continued employment or achievement of performance milestones. Additionally, vesting helps mitigate the risk of granting significant equity upfront to individuals who may leave the company shortly after joining.
Once the equity has fully vested according to the predetermined schedule, the individual has complete ownership rights and can exercise any associated rights, such as selling or transferring the equity. However, if the individual leaves the company before the equity fully vests, they may forfeit or only partially retain their ownership rights, depending on the terms of the vesting agreement.
Vesting is a common practice in startup environments and provides a structure for distributing equity while encouraging long-term commitment and alignment between individuals and the company's success.
