QUESTION:
It is my understanding that the standard vesting period for the senior-level people is 4 years. During that 4 year vesting period, is it normal to do a 100% vest after the fourth year or are some investors ok with cliff vesting?
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofounder of Founders Space
Here is a typical four-year stock option vesting schedule for employees:
- In startups, most employees have their shares vest in exactly the same way, whether they are senior executives or entry level employees.
- Employee stock options usually have a one year cliff. This means the employee must work for the company for an entire year before any shares vest. If the employee leaves or is fired before the year is up, his/her shares never vest. If the employee is with the company for the full year, 25% of his/her shares vest.
- After the first year, the shares vest on a monthly or quarterly basis.
- After four years, 100% of the shares are fully vested.
That’s usually how things are structured, although there are always exceptions to the rule. Also, some employees may receive additional stock options that vest over four years as a bonus or reward for good performance. These additional stock options have their own vesting start date.
One more thing, founders usually own founders shares, but the company typically reserves the right to buy them back. This is different from employee stock options described above, but the end results tend to be similar.
I hope this helps!
Great article Naomi! I found this information to be extremely helpful. Thank you so much! I have a couple of quick questions:
1. Is there some form of documentation that I should obtain from my current employer regarding share vesting?
2. If I’m partially vested (50%) and leave my startup for another opportunity. What sort of documentation should I get to ensure I still have my ownership?
I got an offer letter from my company with the stcok option of 1000 Shares with a strike price of 15$….I dnt have any idea of how stock works completely.
If I exercise the share or selling fter 4 years(vesting compeleted). How much money i can make in Dollars?
Please explain me with one simple example
I’ve been reading on vasting for a number of days, but multiple questions seem to be addressed no-where. And without examples, the whole matter remains utterly vague to me.
– Where do vested shares for the new member come from? The hands of prior founders? A reservation within the business? How does this get administered?
– What if an investment round, down or up, takes place between signing of the vesting agreement and full vesting? Which 1% does the person get, pre new funding, or after? And who pays for unvested % still to be earned? Do the new investors fund a vesting pool much like an option pool?
– In stead of shares, any point in giving options, say at $1 exercise price, assuming actual price will be much higher?
– If yet another employee/founder is added with a vesting schedule, out of whose pockets do the shares come then?
Thanks!
J
Is the common for the one-year cliff to start at the employee start date or “when the next board meeting happens”? Say I start on Feb 1. Is there flexibility in the Schedule A vesting to be either Feb 1 or Apr 1(next quarterly board meeting)?
Thanks
Great answer Naomi. I want to point out one change that we will be seeing over the next few years. Under current accounting rules both annual and monthly vesting schedules can accrue compensation expense in the same way. As we move to a IFRS accounting, each vesting tranche will be treated as if it were its own grant. This means that expense will be somewhat accelerated to earlier n the life of the grant. It also means that grants with monthly vesting as described above will have to account for 37 separate amortization schedules. Not a huge deal, but certainly more complex.
We are seeing company start moving away from monthly vesting for this reason. Even though it is a pretty lame reason to move away from a vesting schedule if you think the vesting schedule works otherwise.
4-5 years. But are you doing a typical startup?