Vesting terms that make sense

Equity is often the primary financial motivation for taking risk in a new venture. To be a proper incentive, the reward of equity should be tied to each person’s contribution to the success of the venture. In an ideal world this would mean milestone-based vesting over several years. However, the reality is that few can predict what milestones will be most important beyond a few months in advance with any accuracy, and therefore most equity award vesting is time-based. Shares held by founders typically vest over a four- to five-year period on a monthly or quarterly basis. Most non-founder employees vest over a four- to five-year period with a one-year cliff (25% vests after the first year) and monthly or quarterly vesting thereafter for the remaining three or four years. The cliff period gives the company time to determine whether the employee is working out before the person gets to keep any of his or her shares. Sometimes founders’ shares do not have a cliff.  

Vesting for board members and advisors is somewhat less standardized but, in general, you should match size and contribution to the time period the person is expected to provide services to the company and generally provide for monthly vesting. Consistency in size and vesting scheme for similarly situated contributors can save real headaches in the future, because it limits case-by-case negotiations and avoids negative feelings when compensation comparisons inevitably occur.

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