Vesting is a common practice in startup companies, where employees are granted stock options or shares of the company over a period of time, instead of receiving them all at once. The purpose of vesting is to align the interests of employees with those of the company and its shareholders, by ensuring that employees have a vested interest in the success of the company over the long term.
How does it work?
In a typical vesting schedule, employees are granted a certain number of stock options or shares over a set period of time, known as the vesting period. For example, an employee might be granted 100,000 shares over a four-year vesting period, with 25% vesting after the first year, and the rest vesting monthly for the remaining 3 years. This means that after the first year, the employee would be entitled to 25,000 shares, and then receive about 2,083 shares per month for the remaining 36 months they are employed.
Vesting schedules can vary depending on the company and the specific terms of the stock option or share grant. Some companies may have a cliff vesting schedule, where a certain percentage of the shares vest all at once after a certain period of time, such as after one year. Other companies may have a graded vesting schedule, where shares vest gradually over time, such as on a monthly or quarterly basis.
What is acceleration?
One important aspect of vesting is the concept of a vesting “acceleration” provision, which allows the vesting of shares to accelerate in certain circumstances, such as if the employee is terminated without cause or if the company is acquired. This ensures that employees are not left empty-handed if they are no longer able to work for the company for reasons outside of their control.
In summary, vesting is a common practice in startups that aligns the interests of employees with those of the company and its shareholders by providing stock options or shares over a set period of time. This ensures that employees have a vested interest in the long-term success of the company and also protects employees in certain circumstances such as termination or acquisition.