What are typical vesting schedules for equity compensation?

Takeaway: The most common vesting schedule for employees is 4 years with a 1-year cliff (i.e., nothing vests until 1 year at which point 25% of the shares vest). After the cliff, the shares vest in even increments monthly for the next three years. For consultants and advisors, the most common vesting schedule is two years monthly vesting.

Equity compensation, such as stock options and restricted stock awards, is a common way for startups to incentivize and retain top talent. However, to ensure that both the company and its employees benefit from equity compensation, it is important to establish clear and fair vesting schemes. Here's a look at the typical vesting schemes for equity compensation issued to employees, consultants, and advisors.

Employees

Equity compensation issued to employees typically follows a four-year vesting schedule with a one-year cliff. This means that the employee's equity compensation does not begin to vest until they have been with the company for one year, and after that, a portion of their equity compensation will vest each month over the next three years until the equity is fully vested. This vesting schedule ensures that employees are incentivized to stay with the company for the long term and that they are rewarded for their contributions over time. Non-executive level employees do not typically receive any acceleration of their equity in the event the company is acquired.

Consultants

Equity compensation issued to consultants typically follows a two-year vesting schedule with no cliff (though specific vesting periods often depend on the expected time the consultant will be providing service to the company). This means that the consultant's equity compensation begins vesting immediately and a portion of the equity will vest each month over the next two years until it is fully vested. This vesting schedule ensures that consultants are incentivized to provide ongoing value to the company and that their compensation is tied to the success of the company over time. Consultants do not typically receive any acceleration of their equity in the event the company is acquired.

Sometimes, a portion of the equity compensation issued to a consultant will vest upon achievement of one or more milestones. For example, if the consultant has three deliverables over the course of their service, a portion of the option may vest after each delivery.

Advisors

Equity compensation issued to advisors typically follows a four-year vesting schedule with no cliff. This means that the advisor's equity compensation begins vesting immediately and will be fully vested after four years. This vesting schedule ensures that advisors are incentivized to provide value to the company and that their compensation is tied to the success of the company during that time. Advisors do not typically receive any acceleration of their equity in the event the company is acquired.

Conclusion

By establishing clear and fair vesting schemes for equity compensation, startups can ensure that they are incentivizing and retaining top talent while also aligning their interests with the long-term success of the company. It's worth noting, however, that the vesting schemes discussed above are not set in stone, and startups may choose to adjust them based on their specific needs and circumstances. For example, startups may offer more or less equity compensation to certain employees or consultants, or they may adjust the vesting schedule to reflect different time horizons or milestones.