What it is Common Vesting Schedules and how it works ?
Vesting schedules are a common feature of equity compensation plans, particularly in startup companies. Vesting schedules determine how and when employees or other stakeholders receive ownership of their shares or stock options. Vesting schedules are used to incentivize employees to stay with a company for a certain period of time and to reward them for contributing to the company’s growth.
Common types of vesting schedules
There are several common vesting schedules that are used in equity compensation plans. The most common vesting schedules include time-based vesting, cliff vesting, and performance-based vesting.
Time-based vesting is the most common vesting schedule used by companies. Under a time-based vesting schedule, a certain percentage of an employee’s shares or options vest over a specified period of time. For example, an employee may receive 25% of their shares after one year, 50% after two years, and 100% after four years. This means that an employee must work for the company for the entire vesting period to receive all of their shares or options.
Cliff vesting is another common vesting schedule used by companies. Under a cliff vesting schedule, an employee receives no vesting until they reach a certain milestone or time period. Once the milestone is reached, the employee’s shares or options vest all at once. For example, an employee may receive no vesting until they have worked for the company for one year, at which point 100% of their shares or options vest.
Performance-based vesting is less common than time-based or cliff vesting. Under a performance-based vesting schedule, vesting is tied to the achievement of certain performance metrics. For example, an employee may receive 25% of their shares or options if the company achieves a certain revenue target, 50% if it achieves another revenue target, and 100% if it achieves a third revenue target.
In addition to these common vesting schedules, there are many variations and combinations of vesting schedules that companies can use. For example, a company may use a time-based vesting schedule with a shorter cliff period, meaning that an employee’s shares or options vest more quickly if they stay with the company for a certain amount of time.
In summary, vesting schedules are a crucial part of equity compensation plans, particularly in startup companies. Time-based vesting, cliff vesting, and performance-based vesting are the most common vesting schedules used by companies, but there are many variations and combinations that can be used to incentivize employees to stay with a company and contribute to its growth.
But at Sprout, we understand that no two startups are alike. That’s why our cap table management supports vesting schedules of all types. We even support hybrid time- and milestone-based vesting schedules, which tend to be the most difficult to track without a dedicated platform like Sprout. Once you see how easy our software is to use, you may even feel more confident in moving forward with the vesting schedule of your choice.
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