A vesting schedule is an incentive program established by a company that gives employees of large companies or founders of small companies full ownership of their stock options pursuant to a table of time periods and percentages.
In the context of small and medium-size companies, the most common vesting schedule lasts for four years, with a one-year “cliff.” For instance, if Mr. Jones owns fifty (50%) percent of a company and leaves after only two years instead of four or more years, he will only retain twenty-five (25%) percent of his stake, instead of 50%. In other words, Mr. Jones’ 50% stake would only become fully vested in the 48th month (4 years). Each month he actively works for the company, a 1/48th of his total equity package vests. However, because of the 1-year “cliff”, if Mr. Jones leaves the company before 12 months, he walks away with nothing.
The purpose of the vesting restrictions is to protect founders and align incentives: it would be unfair for one of the founders to exit the venture in a short period, but still own all of his or her initial stock despite not putting forth comparable effort.
The company stock of the founders that is subject to a vesting schedule is known as restricted stock, which has voting, dividend, and other common stockholder rights. However, the shares are not transferable and subject to forfeiture until the restricted stock vests.
The best time to provide for a vesting schedule is in the beginning, ideally upon incorporation. This is for two reasons: a) the vesting schedule may be utilized as a negotiation tool among multiple founders; b) as it often happens, future venture capitalist investors will impose their own vesting schedule, unless one is already in place.
At times, a vesting schedule may include an “acceleration clause”, which addresses a scenario in which the company gets acquired before a vesting schedule is completed. A single trigger clause accelerates the vesting of a founder’s shares at the time of the acquisition. A double trigger clause accelerates the vesting of the founder’s shares if the company gets acquired and, concurrently, the employment of the founder at the company is permanently discontinued.
Although these are some of the most common features of vesting schedules, there are other considerations that must be taken into account on a case-by-case basis. Reply to this blog post to schedule a free consultation with one of our Attorneys to discuss how a vesting schedule may benefit your company.
Michele Cea is a founding member of the firm. Mr. Cea graduated from Catholic University School of Law in Milan, Italy (J.D., 2009, with honors), and Fordham University School of Law in New York (LL.M., 2011, Cum Laude).