What’s a typical vesting schedule for employee stock options?

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

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!

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Comments & Advice:
  1. Budha Has says:

    4-5 years. But are you doing a typical startup?

  2. Dan Walter says:

    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.

  3. AL says:

    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

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