Common Vesting Schedules

These days, most startup compensation packages include some type of equity award. Not only can the promise of equity-based compensation help attract top-tier talent, but it can keep that talent around via a mechanism called a vesting schedule.

Startups depend on vesting schedules to ensure that employees demonstrate a sustained commitment before receiving full ownership of their equity. Would it make sense to grant a huge pile of employee stock options with no strings attached on an employee’s first day? Probably not, because then the employee would have little financial incentive to stick around. A vesting schedule stipulates exactly what needs to happen before an employee earns the right to exercise options or own shares of common stock (depending on the type of equity award).

Vesting schedules tend to vary between companies, but some are more common than others. In this guide, we’ll review the most common types of vesting schedules and how they work.

Equity is valuable! If you make a habit of giving it away for nothing, it becomes…less valuable. That’s why pretty much every equity grant your company hands out should be subject to vesting and include a vesting schedule.

The two most common types of vesting schedules are graded vesting and cliff vesting. Companies use these schedules for different reasons, and each comes with pros and cons for employer and employee alike.

More recently, companies such as Snapchat have begun to use back-weighted vesting, which further encourages employee retention by incentivizing employees to stick around longer.

Employees tend to like graded vesting schedules, as they’re easier to understand and a bit more favorable to the employee. A graded vesting schedule grants the employee ownership of their equity gradually, over the course of the full vesting schedule.

Here’s an example of what a graded vesting schedule would look like for a grant of 10,000 Restricted Stock Units (RSUs), spread across a typical vesting period of four years:

Note that many startup vesting schedules split up vesting into quarters, rather than years. So, an employee on a graded vesting schedule might begin to receive equity ownership after as little as three months.

Vesting cliffs prevent an employee from reaping any value from an equity award if the employee leaves within a short period of time—typically one year. With a cliff vesting schedule, the bulk or entirety of the award is granted only after the employee has stayed with the company for a certain period of uninterrupted service.

This can look extreme or pretty standard, depending on how it’s set up. Let’s look at a standard example you’ll run into at lots of startups, which includes a four-year vesting schedule with a one-year cliff. We’ll use the same 10,000 RSU grant as in the example above:

As you can see, the above schedule looks remarkably similar to the graded vesting schedule example. The key difference is that no RSUs vest until the end of the first year. After that, RSUs vest on a monthly schedule.

In a more extreme example, you might see three-year cliff vesting in which the employee receives no portion of the equity award until the end of the third year.

Back-weighted vesting is a newer type of vesting schedule that more heavily favors the employer. It places the most significant vesting events toward the end of the vesting period, and minimizes the equity ownership an employee receives in their first years of employment.

Here’s an example with an equity grant of 10,000 RSUs, in which lower percentages of the total award vest in years 1 (10%) and 2 (20%) and greater percentages are back-weighted in years 3 (30%) and 4 (40%).