How Does Vesting Work?

Ask a founder "how does vesting work?" and you usually get half an answer: "you earn your shares over four years." True, but the half they skip (cliffs, triggers, repurchase rights, exercise windows) is where people actually gain or lose money. This lesson covers the whole mechanism.

The core idea is simple. A grant of equity (shares or options) comes with a schedule. Until a portion vests, you don't really have it: unvested options can't be exercised, and unvested founder shares can be bought back by the company. Vesting converts "promised" equity into "yours", one month at a time.

Why vesting exists

Vesting solves two problems, and understanding them tells you why every serious investor insists on it.

Co-founder risk. Two founders split a company 50/50 with no vesting. Eight months in, one loses interest and leaves, with half the company, permanently. The remaining founder now does 100% of the work for 50% of the outcome, and every future investor sees a cap table where half the equity sits with someone who contributes nothing. Deals have died over exactly this. With a standard schedule, the departing founder would have kept 0% (before the cliff) instead of 50%.

Employee retention. Equity is deferred compensation. If a new hire's options all vested on day one, the incentive to stay would vanish the moment the grant was signed. A four-year schedule means the grant pays out for staying and compounding your contribution, which is the entire point of paying people in equity rather than only cash.

There's a third, quieter reason: vesting keeps the cap table honest. Ownership on paper should roughly track contribution over time, and vesting is the mechanism that enforces it.

The standard schedule: 4 years, 1-year cliff

The market default, in the US and widely copied elsewhere, is four years of monthly vesting with a one-year cliff. Mechanically:

• Nothing vests during the first 12 months (the cliff).
• At month 12, 25% of the grant vests at once (the cliff "catch-up").
• After that, 1/48 of the grant vests each month for the remaining 36 months.
• At month 48, the grant is 100% vested.

The clock starts at the vesting commencement date, which is usually the start date, not the day the paperwork is signed. Boards often approve grants weeks after someone joins, so the commencement date is backdated to the first day of work. Check it: a three-month gap between start date and commencement date silently costs three months of vesting.

Variants exist. Some companies vest quarterly instead of monthly (chunkier, slightly worse for the employee). A few large tech companies back-load schedules (for example 10% / 20% / 30% / 40% by year), which pays much less to anyone who leaves early. When you're comparing offers, always ask for the schedule, not just the share count.

Cliffs: the all-or-nothing first year

The cliff is a probation period for equity. Its logic: if a hire doesn't work out in the first year, they shouldn't leave with a sliver of the company, and the company shouldn't carry dozens of tiny ex-employee stakes on the cap table.

Three things to know about cliffs:

• It's binary. Leaving at month 11 and 29 days means zero. Leaving one day after the cliff means 25%. Both employers and employees should know exactly when cliff dates fall. Terminations timed suspiciously close to a cliff are a known source of disputes (and lawsuits).
• It catches up, not forward. The 25% that vests at month 12 is the accrued months 1–12, not a bonus. From month 13 the schedule is ordinary monthly vesting.
• One year is convention, not law. Advisor grants often use shorter or no cliffs; some founder agreements between long-time collaborators drop the cliff entirely because the "do we work well together?" question is already answered.

Acceleration: single trigger vs double trigger

Acceleration clauses vest equity early when defined events happen. They matter most in one scenario: your company gets acquired while your grant is partly vested.

Single trigger means one event, usually a change of control (the acquisition itself), accelerates some or all unvested equity. Sounds great for the holder, but acquirers dislike it: the people they're buying get paid in full and lose the incentive to stay. Single-trigger for a whole team can genuinely reduce the price a buyer will pay. It's now rare outside of specific founder or advisor deals.

Double trigger means two events must both happen: (1) a change of control, and (2) the holder is terminated without cause (or resigns for "good reason", like a forced relocation or demotion) within a defined window, typically 12 months after closing. This is the market standard for executives and increasingly common for all employees, at 50–100% of the unvested balance. It protects people from being acquired and then discarded, without removing the retention incentive.

Reverse vesting for founder shares

Founders usually buy their common shares outright at incorporation, for a nominal price. So how do you vest something someone already owns? You run it in reverse: the founder owns 100% of the shares from day one, but the company holds a repurchase right over the unvested portion, at the original (nominal) price, and that right lapses on the same schedule ordinary vesting would follow.

Investors routinely require founders to (re)accept vesting on their shares at the first priced round (even founders who've been at it for years), though credit for time already served is negotiable and common. One US-specific note worth flagging to your lawyer: shares subject to repurchase can create tax problems unless an 83(b) election is filed within 30 days of purchase. Miss that window and each vesting tranche can become taxable income. This is a lawyer-and-accountant conversation, not a DIY one.

Milestone vesting

Not all vesting is time-based. Milestone (or performance) vesting ties tranches to events: shipping a product, hitting a revenue number, obtaining a regulatory approval, closing a funding round. It's common for advisors ("500 shares per introduction that closes"), for founder earn-outs in acquisitions, and occasionally for executive grants.

The failure mode is ambiguity. "Vests on launch of v2" invites a fight about what counts as launched. Good milestone grants define the trigger objectively (a metric, a date-stamped external event, a board certification) and say who decides. If a milestone can be gamed or stalled by either side, expect it to be.

Milestone grants also make record-keeping harder: someone has to notice the milestone happened, record the vest date, and keep the evidence. This is where tooling starts to matter. In Vquity, each grant carries a vesting ledger that records schedules, cliffs, milestone events, and accelerations against the grant itself, so the "who has vested what, as of when" question has one answer instead of three spreadsheets.

What happens when someone leaves

Departure is where every clause above cashes out. The outcomes split by what's vested and why the person is leaving.

Unvested equity is forfeited. Unvested options are cancelled and usually return to the option pool. Unvested founder shares get repurchased at the nominal price, as above. No debate. This is the whole design.

Vested options come with a deadline. Leavers don't keep vested options indefinitely; they must exercise (buy the shares at the strike price) within a post-termination exercise window. The classical window is 90 days, anchored in a US tax rule that ISOs (incentive stock options) lose their favorable status if exercisable longer than 90 days after employment ends. Some companies now extend windows to 5–10 years (the options convert to NSOs), which is dramatically friendlier to employees who can't afford to exercise.

Good leaver vs bad leaver. UK and European documents often classify departures explicitly. A good leaver (redundancy, illness, death, sometimes plain resignation after a period) keeps vested equity or is bought out at fair value. A bad leaver (dismissal for cause, breach of restrictive covenants, sometimes any voluntary resignation) can be forced to sell even vested shares back at the lower of cost or fair value. Bad-leaver definitions vary enormously and are heavily negotiated. If a document defines every resignation as "bad", the vesting schedule is much weaker than it looks.

Cause matters everywhere. Even outside good/bad-leaver regimes, termination "for cause" usually cancels all options, vested or not. The definition of cause in the plan document is therefore worth reading before you sign, not after.

That's vesting end to end: a schedule, a cliff, triggers for the exceptional cases, and clear rules for departure. Next, we'll look at where employee options come from in the first place: the option pool, who pays for it, and why its size gets negotiated in every round.