Vesting Schedule
What is Vesting Schedule?
A vesting schedule specifies the timeline over which an employee or founder earns the right to keep their granted equity. If you grant 1% equity with a 4-year vesting schedule, the employee typically earns 0.25% per year (or 1/48th per month). If they leave before the schedule completes, they forfeit unvested shares.
Why It Matters
Vesting schedules are essentially golden handcuffs. They ensure that only people who stick around long-term actually get their equity. This matters because equity is expensive capital that's easy to waste on employees who leave in month two. Vesting also aligns incentives: if the company sells in year 3, employees who've only vested 75% understand why the founder still owns meaningful equity. It's a fairness mechanism disguised as incentive alignment.
How to Apply
Standard market vesting is a 4-year schedule with a 1-year cliff. The cliff means an employee vests nothing for the first year; if they leave month 11, they get zero equity. After year one, they've vested 25%, then they vest monthly over the remaining 3 years. For founders granting equity to early employees, use the same schedule—this is what's expected. Be aware that the cliff creates risk for new hires; some will leave anyway and feel cheated. Offer cliff acceleration for exceptional hires if you want to reduce that risk.
Common Mistakes
- Vesting equity too quickly (2-year schedules) and diluting founder control with unproven employees
- Not having a cliff, which means employees can leave month 2 with 16% vested
- Offering different vesting schedules to different early employees, creating equity drama later
How IdeaFuel Helps
IdeaFuel's Business Plan Generator models vesting schedules for your equity grants, showing the cash-flow implications of employee option exercises and tax obligations as equity vests.