What are typical vesting schedules for equity compensation?
Takeaway: The "four-year vest with a one-year cliff" is the universal and non-negotiable standard for startup equity; it is the fundamental mechanism for aligning long-term incentives and protecting the company from early employee departures.
Vesting is the process by which an employee or founder "earns" their equity over a period of continued service to the company. It is the single most important mechanism for aligning long-term incentives and for protecting the company's ownership structure. The concept is simple: you don't get all your equity on day one. You have to stay with the company to earn it.
While a company could technically create any vesting schedule it wants, the startup ecosystem has coalesced around a single, dominant, and universally understood standard. For any venture-backed startup, this standard is not just a "best practice"; it is the expected norm.
The Gold Standard: The "Four-Year Vest with a One-Year Cliff"
This schedule has two key components:
The One-Year "Cliff": This is a critical protection for the company. The "cliff" means that if an employee leaves the company for any reason before their one-year anniversary, they walk away with zero vested shares. They must stay for at least one full year to earn their first tranche of equity.
How it works: On the one-year anniversary of their vesting start date, the employee's first 25% of their total grant (12 months out of 48) vests all at once.
The Rationale: The one-year cliff protects the company from a "bad hire." If you hire a senior executive and it becomes clear after six months that they are not a good fit, you can part ways without them walking away with a significant chunk of the company's equity.
The Monthly Vesting (Post-Cliff): After the one-year cliff is reached, the remaining 75% of the grant typically vests in equal monthly increments over the next three years.
How it works: Each month, the employee vests an additional 1/48th of their total grant. This creates a smooth, continuous vesting schedule for the remainder of their four-year term.
Why is this the Universal Standard?
It Aligns for the Long Term: A four-year schedule is long enough to ensure that employees are committed to building the company for a meaningful period of time.
It's Predictable and Fair: Because it is the universal standard, it creates a sense of fairness and predictability for all employees. Everyone, from the founders to the most junior hire, is typically on the same four-year vesting schedule.
Investor Expectation: Every sophisticated venture capital investor will expect the company to use this standard vesting schedule for all employees and founders. A deviation from this standard without a very compelling reason would be a major red flag during due diligence.
While there can be some minor variations, the "four-year vest with a one-year cliff" is the bedrock of startup equity compensation. It is the fundamental social and financial contract that balances the company's need for long-term commitment with the employee's desire to earn a meaningful ownership stake.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.