The Agile Startup: Quick and Dirty Lessons Every Entrepreneur Should Know

Mess with the Vest, Die Like the Rest

Vesting is a way to make people earn their equity over time. Instead of giving 100 percent of an equity grant up front, vesting allows you to award it over time. With a four-year vest, which is the usual amount of time to vest, equity would not be awarded in full until after four years have passed.

You can choose to award the prorated equity in monthly or yearly installments (known as cliffs). After 18 months, a four-year vest of 10 percent with a monthly cliff results in 3.75 percent equity earned (18 months passed/48 month vest × 10 percent equity grant). With an annual cliff, the same 18-month time period results in only 2.5 percent earned, since the second year hasn’t yet been reached (1/4 × 10 percent).

Vesting creates a strong incentive for your employees and partners to stick around. It protects you if they decide to leave early, since they get to keep only the equity that they’ve earned. Everyone in the company with equity should be subject to a vest, especially cofounders. Without a vest, your 50 percent partner can leave after a few months and keep all 50 percent.

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