Glossary - Vesting

Vesting means that at the very beginning each founder gets his or her full package of stocks at once to avoid getting taxed for capital gains; but, the company has the right to purchase a percentage of the founder’s equity in case he or she walks away. This means that if your partner walks away after a couple of months, he or she will not be able to claim those 100 million dollars because the company purchased his or her equity when he or she left the company. In essence, vesting protects founders from each other and aligns incentives so everybody focuses towards a common goal: building a successful company.

Standard vesting clauses typically last four years and have a one year ‘cliff’. This means that if you had 50% equity and leave after two years you will only retain 25%. The longer you stay, the larger percentage of your equity will be vested until you become fully vested in the 48th month (four years). Each month that you actively work full time in your company, a 1/48th of your total equity package will vest. However, because you have a one year cliff, if one of the founders leaves the company before the 12th month, then he or she walks away with nothing ; whereas staying until day 366 means you get one fourth of your stocks vested instantly.

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