Equity Vesting ! Attract co-founders and key employees smartly
Vesting is the technique used to allow ‘employees’ to earn their equity over time. We can apply the same technique to co-founders, or board of advisory members.
When we say ‘over time’ it is usually 3–4 year vest. You earn your stock or options over a fixed period of time. So let us say the vesting schedule is a 4 years one, then the employee will receive 25% of her options/stock after year one, 25% after year two, 25% after year three, and 25% after year four.
One year cliff vest
An important concept to vesting schedule is one year cliff vest. This means the employee has to be employed for one full year before starting to vest into any stock or options. This concept helps protect the company from a bad hire. Obviously -Ethically- an employer can not remove the employee a couple of days or shortly before the end of their first year without giving them any stocks. Employer should bear the responsibility of taking a wrong recruitment choice in the first place and for taking almost a year to realize that !
Now let us imagine the employee/co-founder or a member of advisory board is on their third year of the vesting schedule when the company is about to be purchased. What is a possible scenario? Usually, upon a change of control, such as a selling transaction, the company would offer an accelerated vesting (to certain employees). Of course, here the company can go for either a full accelerated vesting: All the stock that is not vested before the purchase date get vested. So say the employee is in their second year of the vesting schedule, they get all the stocks till the end of the fourth year. Or a double trigger: meaning two things have to happen in order to get the acceleration — Change of control AND proposed demotion or termination.