Tag Archives: compensation

Stock Vesting

Every startup CEO learns about stock vesting. The CEO learns why he/she does not want it to apply to their equity; but wants it to apply to everyone else in the startup who receives equity.

Basically vesting controls how fast the recipient of equity actually owns it and in theory could sell it.

Ownership in startups

Startups typically give grants of common stock or more frequently stock options to officers and sometimes to all employees. Some Walmart janitors became millionaires because they had stock options at the time of the Walmart IPO. Consultants, Members of the Board of Directors, lawyers and even major vendors may receive equity from a startup.

Stock vesting

Vesting means they need to stay committed to the startup for typically four years (sometimes five years) in order to actually own the equity (be fully vested).

The recipient or grantee receives options or shares of common stock. If it vests over four years then (usually) 1/48th of the shares or options vest each month. Only those shares or options that have vested can be exercised and sold.

Vesting terms are usually four years except for Board Members and others smart enough to negotiate shorter periods. Well-informed consultants frequently insist that all equity is fully vested upon receipt.

Exercise

If an employee leaves the startup than the US option plan will typically say that the options must be exercised within 90 or 180 days. The entire value that has not been exercised within the specified time period (after leaving) is lost.

Stock (share) grants are similar; except there is no need to pay to exercise them. Thus non-employees prefer shares over options.

Employment Contracts

A well-informed founder will put an employment contract in place just after founding a startup. It will include a vesting plan that started when the startup was formed. Otherwise two or three years later a VC may tell the CEO that they will fix him/her up with an employmemt agreement; which will include vesting starting at that time; not when the startup was formed.

Cliff

There may be a six or twelve months cliff. Four year vesting with a six month cliff means that the recipient/grantee earns no vesting for the first six months. At the end of the six months the recipient/grantee has 6 x 1/48 of the shares/options suddenly vested. Thereafter 1/48th of the shares or options vest each month.

References

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