Practical Guide to Vesting Schedules for Founders and Employees: Four-Year Standard

Why Vesting Is an Essential Alignment Tool

Starting a company means thinking about equity, but one of the first surprises for many founders is the concept of a vesting schedule. The idea that you must earn ownership in the business you created can feel counterintuitive. However, this is not a roadblock from investors or a sign of mistrust; it is a foundational mechanism designed to align long-term commitment with long-term rewards. Understanding how do startup vesting schedules work is essential for securing funding, hiring key talent, and protecting the company's future.

Vesting is a process of earning an asset, like stock options or shares, over a set period. Vesting isn't a penalty. It’s a powerful tool for aligning the interests of all stakeholders: founders, investors, and employees. The core purpose is to ensure that equity, the most valuable currency a startup has, is held by those actively contributing to the company's growth and value creation.

Imagine a scenario with two co-founders who each own 50% of their new company. If one decides to leave after just six months, should they retain their full 50% stake? Without a vesting schedule, they would. This would leave a massive block of “dead equity” on the capitalization table, an ownership stake held by a non-contributor. This situation makes the startup significantly less attractive to future investors and potential hires, as a large portion of the rewards are already allocated to someone no longer building the business. Vesting protects the company from this critical risk by requiring a commitment of time and effort to earn full ownership.

How Do Startup Vesting Schedules Work? The Standard Framework

When investors put capital into a startup, they are betting on the commitment of the founding team. The vesting schedule is their assurance that the team is dedicated to the long run. The market standard for this commitment is well-defined. "The market standard vesting schedule for founders and early employees is a four-year term with a one-year cliff." This structure provides a clear, predictable formula that has become the default in most venture-backed deals in both the US and the UK.

The One-Year Vesting Cliff Explained

The mechanics are straightforward. The one-year “cliff” is the first major milestone in any standard startup equity agreement. "During the first 12 months (the cliff period), 0% of equity vests." This means if a founder or employee leaves before their first anniversary, they walk away with no equity, protecting the company from the disruption of very early departures. The reward for clearing this first hurdle is significant. "On the first anniversary of the vesting start date, 25% of the total equity grant vests." At the 12-month mark, a quarter of the total grant is earned in a single block, compensating the individual for their foundational year of work.

Vesting After the Cliff: Monthly vs. Quarterly

After the one-year cliff is met, vesting becomes a steady, incremental process. "The remaining 75% of equity typically vests in equal monthly or quarterly installments over the subsequent three years." For a monthly schedule, the remaining equity vests in 36 equal portions, one for each month of service. A monthly cadence is generally seen as more employee-friendly and is now the most common approach, especially with cap table management software like Carta or Pulley simplifying the administration. Quarterly vesting is less common but may be used by very early-stage companies managing their cap table on a spreadsheet to reduce administrative work.

The Vesting Commencement Date

A small but critical detail in any founder or employee equity agreement is the vesting commencement date. This is the official start date for the vesting clock. It is typically the first day of employment or service but can sometimes be set to a different date by the board of directors. Ensuring this date is clearly defined and documented in the grant agreement prevents future confusion and disputes about when the cliff is met and how much equity has vested at any given time.

Founder Share Vesting vs. Employee Stock Options

While the four-year schedule is standard for both founders and employees, the type of equity they receive often differs. Understanding this distinction is key to managing your company’s ownership structure and incentives effectively. Founders typically receive actual shares, while employees are granted options.

Founder Equity: Restricted Stock Subject to Vesting

In the US, founders often receive restricted stock awards (RSAs). This means they are issued shares on day one, giving them immediate ownership and voting rights. However, these shares are subject to a repurchase right by the company, which lapses according to the vesting schedule. If a founder leaves before they are fully vested, the company can buy back the unvested shares at the original, typically very low, purchase price. This structure is common for founders because it allows them to be shareholders from the outset.

Employee Equity: Stock Options

Employees, on the other hand, usually receive stock options through an employee stock option plan (ESOP). An option is the right to buy a certain number of shares at a predetermined price, known as the exercise price or strike price. This price is typically set based on the fair market value (FMV) of the shares on the date the options are granted. Employees earn the right to exercise (purchase) their options as they vest. They only become shareholders after they have both vested and exercised their options.

Key Jurisdictional Differences: US vs. UK

The tax treatment of equity compensation varies significantly between countries. For US-based companies, employees might receive Incentive Stock Options (ISOs) or Non-qualified Stock Options (NSOs), each with different tax implications. In the UK, the Enterprise Management Incentive (EMI) scheme offers highly favorable tax treatment for qualifying startups and their employees. EMI options allow employees to benefit from a lower Capital Gains Tax rate upon selling their shares, making it a powerful tool for attracting talent in the British tech ecosystem.

Negotiating Equity Terms for Key Events: Understanding Acceleration Provisions

Founders often worry about what happens to their unvested equity if the company is acquired before their four-year vesting schedule is complete. If you sell after two years, do you automatically forfeit the remaining 50%? Not necessarily. This is where acceleration clauses come in. These are among the most important provisions to negotiate in any founder equity agreement or funding round.

Acceleration defines how unvested equity is treated upon certain trigger events, primarily an acquisition or change of control. There are two main types of acceleration provisions:

• Single-Trigger Acceleration: This is less common for founders but sometimes offered to key advisors or independent board members. A single event, the acquisition itself (the “change of control”), triggers some or all unvested equity to vest immediately.
• Double-Trigger Acceleration: This is the market standard for founders and key executives. It requires two distinct events to occur for acceleration to take effect. The first trigger is the acquisition. The second trigger is the involuntary termination of the founder or employee by the acquiring company “without cause” or their resignation for “good reason” (such as a significant demotion or pay cut). "The second trigger in a double-trigger acceleration clause typically applies for a period of 12-18 months post-acquisition."

Consider a SaaS founder with 1,000,000 shares on a standard 4-year vesting schedule. The company is acquired exactly two years in, meaning 500,000 shares (50%) are vested.

1. Scenario 1: No Acceleration. Three months after the acquisition, the acquirer terminates the founder’s role. The founder leaves with only their 500,000 vested shares. The other 500,000 unvested shares are forfeited and returned to the company.
2. Scenario 2: Double-Trigger Acceleration. The acquisition is the first trigger. The termination without cause is the second. Because both events occurred, the remaining 500,000 unvested shares vest immediately upon termination. The founder leaves with their full 1,000,000 shares.

This distinction has a massive financial impact. Double-trigger acceleration protects founders and key employees from being acquired and then immediately fired to prevent their remaining equity from vesting.

Building Your Team with an Employee Stock Option Plan (ESOP)

Beyond founder equity, vesting is the engine of your ESOP. It is how you convert team members into owners who are deeply invested in the company's long-term success. Applying the standard 4-year vest with a 1-year cliff consistently across all early hires is crucial for fairness and simplicity. Trying to create custom vesting schedules for each new employee adds unnecessary complexity to your cap table, which can be a red flag for investors during due diligence.

The Post-Termination Exercise (PTE) Period

While the vesting schedule itself is typically non-negotiable, the post-termination exercise (PTE) period is a term that offers more flexibility. The PTE period is the window of time an employee has to purchase their vested stock options after leaving the company. "The standard post-termination exercise (PTE) period for vested options is 90 days after departure." This short window can create a significant financial challenge for employees who may not have the cash on hand to exercise their options. Recognizing this, some forward-thinking startups are extending this period to several years, but the 90-day standard remains common.

Managing Tax Implications for Your Team

For US-based startups that grant restricted stock or allow for the early exercise of options, it's crucial to educate your team on tax implications. Early exercising allows an employee to purchase their options before they vest. To manage the potential tax liability, "An 83(b) election must be filed to take advantage of potential tax benefits from early exercising stock options." This election must be filed with the IRS within 30 days of the stock purchase. Failing to do so can result in a much larger ordinary income tax bill down the road when the shares are worth more.

Practical Takeaways for Founders

Navigating startup equity can seem complex, but the principles of vesting are designed for clarity and protection. For founders, the path forward is clear.

1. Embrace the Standard Vesting Schedule. Accept the 4-year vest with a 1-year cliff for yourself and your co-founders. It’s what investors expect and what protects the business from early departures and dead equity. The standard is the standard for a reason.
2. Apply It Consistently to Your Team. Implement this same schedule for all employee equity grants. This creates a fair and transparent system that is easy to manage and explain. Differentiate compensation through the number of options granted, not by creating varied and complex vesting terms.
3. Negotiate for Double-Trigger Acceleration. Ensure you and your key team members have double-trigger acceleration in your financing and employment agreements. It provides critical protection and ensures your years of hard work are rewarded in an exit scenario.
4. Educate Your Team on Tax. For US-based companies, ensure your team understands the mechanics and deadlines of an 83(b) election if they are early-exercising stock. In the UK, understand the requirements for setting up a tax-advantaged EMI scheme.

By embracing these standards, you use vesting not as a restriction, but as a strategic tool to build a committed, aligned, and successful company.

Frequently Asked Questions

Q: What happens if a co-founder leaves before the one-year cliff?
A: If a co-founder leaves before completing one year of service, they typically walk away with no equity. The one-year cliff is designed to protect the company from this exact scenario, ensuring that their unvested shares are returned to the company treasury for future use.

Q: Can you renegotiate your vesting schedule later on?
A: It is possible but uncommon. Renegotiating a vesting schedule, often called a "vesting refresh," might happen after several years to re-incentivize a founder or key employee. However, this usually requires board and investor approval and is reserved for special circumstances, not as a standard practice.

Q: Is a 4-year vesting schedule with a 1-year cliff the same in the UK and the US?
A: Yes, the 4-year term with a 1-year cliff is the market standard in both the US and the UK for venture-backed technology companies. While the type of equity and tax implications differ (e.g., ISOs/NSOs in the US vs. EMI options in the UK), the time-based vesting structure is remarkably consistent.

Q: What is the difference between vesting and exercising stock options?
A: Vesting is the process of earning the right to purchase your stock options over time. Exercising is the act of actually buying the shares at the predetermined strike price. An employee must first vest their options before they are able to exercise them and become a shareholder.