Glossary · Equity and dilution · Updated
Vesting is the mechanism by which shares or options are only definitively earned over time spent at the company. The norm is four years with a twelve-month cliff during which nothing vests: leaving before that date means keeping nothing.
Vesting protects the company against a specific and common scenario: a cofounder or key employee leaving after a few months with a significant slice of the equity. Without it, the cap table fills with shareholders who no longer contribute, which makes later rounds considerably harder.
The cliff is the harshest and least understood part. For twelve months, vesting is zero, not partial. Leaving in month eleven leaves nothing; leaving in month thirteen leaves a quarter of the grant. It is a step, not a slope, and it is better understood before you resign.
For founders the mechanism takes a particular form, often called reverse vesting. Since they already own their shares, those cannot be granted progressively: instead there is a promise to sell back unvested shares on departure. The economics are identical, the legal machinery differs.
Example: a four-year vesting schedule
A cofounder holds 400,000 shares, vesting over four years with a twelve-month cliff.
| Total allocation | 400,000 shares |
|---|---|
| Vesting period | 4 years, or 48 months |
| Cliff | 12 months |
| Vested at month 6 | 0 shares |
| Vested at month 11 | 0 shares |
| Vested at month 12 | 100,000 shares, or 25% |
| Pace after the cliff | monthly, about 8,333 shares per month |
| Vested at month 24 | 200,000 shares, or 50% |
| Vested at month 48 | 400,000 shares, or 100% |
Between month 11 and month 12, vesting jumps from zero to a hundred thousand shares. It is the only point in the schedule where one month makes a difference of that size.
The common mistake
Putting founder vesting in place only at the first funding round. By then, whoever contributed least has already accrued years of notional seniority, and the conversation becomes very difficult. The right moment is incorporation.
Frequently asked questions
What is a cliff?+
An initial period, usually twelve months, during which nothing vests. At the end of the cliff the corresponding portion vests in one go, then vesting continues monthly. Leaving before the cliff ends leaves you with nothing.
Do founders have vesting too?+
Yes, investors require it almost systematically. Since founders already hold their shares, it takes the form of a promise to sell back unvested shares on departure, often called reverse vesting, with identical economics.
Related terms
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