Vesting schedules and cliffs explained

If you're setting up founder stock or making your first equity grants, the vesting schedule decides how much of that equity a person has actually earned at any point. It is also the term that matters most when someone leaves early, which is when it is most likely to be read closely.

A vesting schedule releases equity over time, so a person earns their shares or options gradually rather than all at once. A cliff is an initial period during which nothing vests, after which a block vests at once. The standard startup schedule is four years with a one-year cliff: nothing vests for the first 12 months, 25% vests at the one-year mark, and the remainder vests monthly over the next three years.

Below is how the standard schedule works in practice, how vesting differs for founders and employees, and the terms that change the outcome when someone leaves or the company is sold.

The standard schedule is four years with a one-year cliff

Take an employee granted options on 48,000 shares, vesting over four years with a one-year cliff.

Months 1 to 11. Nothing vests. If the employee leaves during this period, the entire grant is forfeited.

Month 12. The cliff passes and 12,000 shares vest at once, 25% of the grant.

Months 13 to 48. The remaining 36,000 shares vest at 1,000 per month.

An employee who leaves at month 11 keeps nothing. One who leaves at month 13 keeps 13,000. The cliff exists to give the company a trial period before any equity is earned, so that a hire who doesn't work out leaves without a stake in the company.

Vesting start date. The schedule runs from the vesting commencement date, which is usually the employee's start date rather than the date the board approves the grant. Grants are often approved weeks after someone starts, and the earlier date keeps their schedule aligned with their actual tenure.

Vesting works differently for founders and employees

The schedule can be identical, but the mechanism is not.

Founders usually own their shares from day one. Founders buy restricted stock at formation, so the shares are issued and voted immediately. Vesting works in reverse: the company has the right to repurchase unvested shares, usually at the original price, if the founder stops working for the company. As shares vest, that repurchase right lapses.

Employees usually earn the right to buy. Employees typically receive stock options. Vesting determines how many options become exercisable, and the employee owns no shares until they exercise and pay the exercise price.

Credit for work before incorporation. Founders who worked on the company before incorporating sometimes negotiate vesting credit for that period, either by backdating the vesting commencement date or by vesting a portion immediately. Investors generally expect most founder equity to remain subject to vesting at the first priced round.

Vesting has tax consequences for restricted stock

Restricted stock. Unvested shares are taxed as they vest, at their value on each vesting date, unless the holder files an 83(b) election within 30 days of receiving them. The election moves the tax to the date the shares are received, when the value usually equals the price paid and the taxable amount is zero.

Stock options. Vesting itself is not a taxable event. Tax arises at exercise for non-qualified stock options, and at sale for incentive stock options that meet the holding periods, though exercising ISOs can trigger alternative minimum tax.

Restricted stock units. RSUs are taxed as ordinary income when the shares are delivered, which is usually at vesting.

Early exercise. Some plans let employees exercise options before they vest. The shares they receive are restricted stock subject to repurchase, so the 83(b) election applies, with 30 days from the exercise date.

What happens to unvested equity when someone leaves

Unvested founder shares. The company can repurchase them, usually at the lower of the original price or the current fair market value. Repurchased shares become treasury shares or are retired.

Unvested options. They are forfeited and typically return to the option pool for future grants.

Vested options. The departing employee keeps them but must exercise within the post-termination exercise window. The default is often 90 days. For incentive stock options, exercise generally has to happen within three months of termination to keep ISO treatment. Some companies extend the window, which converts ISOs into non-qualified options after the three months.

Vested founder shares. These belong to the founder and stay with them.

Acceleration changes the schedule on a sale

Acceleration provisions speed up vesting when a specified event happens.

Single-trigger acceleration. Some or all unvested equity vests on a sale of the company alone. Acquirers dislike it, because the team they are buying can leave fully vested the day the deal closes.

Double-trigger acceleration. Unvested equity vests only if the company is sold and the person is terminated without cause, or resigns for good reason, within a set period after the sale. This is the more common term for founders and senior hires because it protects the individual without removing the acquirer's retention incentive.

Partial acceleration. Many agreements accelerate a portion, such as 25% or 50% of unvested equity, rather than all of it.

Other schedules exist, and each changes the incentives

Back-weighted vesting. More equity vests in later years, for example 5%, 15%, 40%, and 40% over four years. It rewards staying longer but makes early departures cheap for the company.

Monthly vesting with no cliff. Equity starts vesting immediately. It is sometimes used for advisors or for hires coming from a related company.

Milestone vesting. Equity vests when specific goals are met, such as a product launch or revenue target. It requires clear definitions, because disputes about whether a milestone was met are common.

Refresh grants. Companies often give long-tenured employees new grants on their own schedules so that some equity is always still vesting.

How Inkle fits in

Inkle Incorporation assists with Delaware C-Corp incorporation.

The bottom line

A vesting schedule is a retention tool and a protection for everyone who stays. The four-year, one-year-cliff standard is common because it gives the company a trial period, rewards tenure evenly after that, and is what investors expect to see. The details that decide real outcomes sit around the schedule rather than in it: the vesting commencement date, the 83(b) election for restricted stock, the post-termination exercise window for options, and whether acceleration is single or double trigger. Those are the terms worth reading before a grant is signed, not when someone is leaving.

Frequently asked questions

What is a vesting cliff?

A cliff is a period at the start of a vesting schedule during which nothing vests. When it ends, a block of equity vests at once. Under the standard one-year cliff, 25% of a four-year grant vests on the first anniversary.

What happens if I leave before my cliff?

All of the unvested equity is forfeited. Unvested options return to the option pool, and unvested founder shares can be repurchased by the company, usually at the original price.

Do founders need vesting schedules?

In most cases, yes. Investors expect founder shares to vest, typically over four years with a one-year cliff. Vesting also protects the remaining founders if a co-founder leaves early, because the company can repurchase the unvested shares.

Is vesting a taxable event?

For restricted stock, yes, unless an 83(b) election was filed within 30 days of receiving the shares. For stock options, vesting is not taxable. Tax arises at exercise or sale instead. For RSUs, tax is usually due when the shares vest and are delivered.

What is double-trigger acceleration?

It is a provision that vests some or all unvested equity only if two events happen: the company is sold, and the person is terminated without cause or resigns for good reason within a set period afterward. It is more common than single-trigger acceleration, which vests on the sale alone.

When does vesting start?

On the vesting commencement date stated in the grant, which is usually the person's start date. It can be earlier than the date the board approves the grant, and founders sometimes negotiate credit for time worked before incorporation.