Vesting Schedules for Services
Time-based, milestone-based, hybrid models, and acceleration triggers
Overview
What is Vesting?
Vesting is the process by which a service provider earns their equity over time. Until equity is fully vested, it is subject to forfeiture or repurchase if the service relationship ends. Vesting protects the company from granting full ownership to someone who leaves early.
Why Vesting Matters
- Aligns incentives over time
- Protects against early departures
- Creates "golden handcuffs"
- Standard for investors/acquirers
Common Vesting Types
- Time-based (monthly/quarterly)
- Cliff-based (initial waiting period)
- Milestone-based (deliverables)
- Hybrid (time + milestones)
Key Terms
- Vesting Period: Total time to full vesting
- Cliff: Initial period before any vesting
- Acceleration: Speeding up vesting on events
- Forfeiture: Loss of unvested equity
Time-Based Vesting
Standard 4-Year with 1-Year Cliff
The most common vesting schedule in Silicon Valley. No equity vests for the first year (the "cliff"). After the cliff, 25% vests immediately, then the remaining 75% vests monthly over the next 3 years.
Example: 48,000 Shares, 4-Year Vest, 1-Year Cliff
| Month | Event | Shares Vested | Cumulative | % Vested |
|---|---|---|---|---|
| 0-11 | Cliff period | 0 | 0 | 0% |
| 12 | Cliff vests | 12,000 | 12,000 | 25% |
| 13-24 | Monthly vesting | 1,000/mo | 24,000 | 50% |
| 25-36 | Monthly vesting | 1,000/mo | 36,000 | 75% |
| 37-48 | Monthly vesting | 1,000/mo | 48,000 | 100% |
The 1-year cliff ensures that someone who leaves in month 11 gets nothing. It is a probationary period.
Alternative Time-Based Schedules
| Schedule | Cliff | Vesting Frequency | Common Use |
|---|---|---|---|
| 4-year, 1-year cliff, monthly | 12 months | Monthly | Startups (standard) |
| 4-year, 1-year cliff, quarterly | 12 months | Quarterly | Some startups |
| 4-year, no cliff | None | Monthly | Co-founders, key hires |
| 3-year, 1-year cliff | 12 months | Monthly | Advisors, some startups |
| 2-year, 6-month cliff | 6 months | Monthly | Advisors, contractors |
| 5-year, 1-year cliff | 12 months | Monthly | Executive retention |
Milestone-Based Vesting
How Milestone Vesting Works
Milestone-based vesting ties equity to achievement of specific deliverables rather than (or in addition to) the passage of time. Common for contractors, advisors, and project-based relationships.
Common Milestone Types
- Product launch / MVP completion
- Revenue targets
- Funding milestones
- Customer acquisition goals
- Regulatory approvals
Critical Requirements
- Objective, measurable criteria
- Clear acceptance process
- Written confirmation of achievement
- Dispute resolution mechanism
Example Milestone Schedule
CTO Co-Founder: 20% Equity with Milestone Vesting
| Milestone | Criteria | % Vesting | Cumulative |
|---|---|---|---|
| M1: MVP Launch | Working product deployed to production | 5% | 5% |
| M2: First Revenue | $10K MRR sustained for 3 months | 5% | 10% |
| M3: Series A | Close $2M+ institutional round | 5% | 15% |
| M4: Scale | $100K MRR sustained for 3 months | 5% | 20% |
Always include a backstop: what happens if a milestone becomes impossible through no fault of the recipient?
Acceptance Criteria Template
Milestone Definition Template
MILESTONE: [Name]
DESCRIPTION:
[Detailed description of what must be achieved]
ACCEPTANCE CRITERIA:
1. [Specific, measurable criterion #1]
2. [Specific, measurable criterion #2]
3. [Specific, measurable criterion #3]
EVIDENCE REQUIRED:
- [Document/proof required]
- [Verification method]
ACCEPTANCE PROCESS:
1. Service Provider delivers written notice of completion
2. Company has [X] business days to review
3. Company must accept in writing or provide specific objections
4. If objections, [dispute resolution process]
FAILURE TO RESPOND:
If Company fails to respond within [X] days, milestone is deemed accepted.
CERTIFICATION:
Milestone achievement certified by: [Role/Name]
Date of certification: _______________
Hybrid Models
Time + Milestone Vesting
Hybrid vesting combines time-based and milestone-based components. Common structures include parallel vesting (both conditions must be met) or split vesting (some time-based, some milestone-based).
Parallel (Both Required)
- Time must pass AND milestone achieved
- Example: Vests after 12 months if MVP launched
- Protects against quick delivery then departure
- More restrictive for recipient
Split (Portion Each)
- 50% time-based, 50% milestone-based
- Each component independent
- Balanced approach
- More complex to track
Example Hybrid Schedule
VP Engineering: 60% Time / 40% Milestone
| Component | Amount | Schedule | Notes |
|---|---|---|---|
| Time-Based (60%) | 30,000 shares | 4 years, 1-year cliff, monthly | Standard vesting |
| M1: Team Hired (10%) | 5,000 shares | 5 engineers hired, onboarded 90 days | Milestone vesting |
| M2: Platform Launch (15%) | 7,500 shares | V1.0 deployed, 99.9% uptime for 30 days | Milestone vesting |
| M3: Series B (15%) | 7,500 shares | $10M+ Series B closed | Milestone vesting |
Reverse Vesting
How Reverse Vesting Works
In reverse vesting, shares are issued immediately but subject to the company's right to repurchase unvested shares at the original purchase price (often nominal). As time passes, the repurchase right lapses.
Standard (Forward) Vesting
- Shares/options granted but not owned
- Recipient earns shares over time
- Ownership increases with vesting
- No shares until vested
Reverse Vesting
- All shares issued on day one
- Company can repurchase unvested at cost
- Repurchase right lapses over time
- Immediate ownership (subject to risk)
Reverse vesting is ideal for founders who want to file 83(b) elections and start the capital gains clock immediately.
When to Use Reverse Vesting
- Founders at formation: Issue all founder shares subject to reverse vesting
- 83(b) election strategy: Allows immediate election on low-value shares
- Voting rights: Founder retains voting rights on all shares from day one
- Dividend rights: Receives dividends on all shares (if declared)
- Cap table simplicity: Shares are issued, just subject to repurchase right
Reverse vesting requires careful drafting. The repurchase right must be enforceable and the price must be documented.
Acceleration Triggers
Single Trigger Acceleration
Single trigger acceleration means vesting accelerates upon a single event - typically a change of control (acquisition). No additional condition is required.
How It Works
- Company is acquired
- Vesting immediately accelerates
- Some or all unvested equity becomes vested
- No termination required
Concerns
- Acquirers dislike it (windfall to employees)
- Reduces retention incentive post-acquisition
- May reduce acquisition price
- Uncommon for employees
Single trigger is rare except for founders and executives with negotiating leverage.
Double Trigger Acceleration
Double trigger requires two events: (1) a change of control, AND (2) the recipient's termination without cause (or resignation for good reason) within a specified period.
First Trigger: Change of Control
- Acquisition of majority of stock/assets
- Merger where founders lose control
- Sale of substantially all assets
- IPO (sometimes excluded)
Second Trigger: Termination
- Terminated without cause
- Resignation for "good reason"
- Usually within 12-24 months of CoC
- Release of claims often required
Double trigger is the market standard. It protects employees while allowing acquirers to retain talent.
Acceleration Amounts
| Acceleration Type | Common Amount | Typical Recipients |
|---|---|---|
| Full acceleration | 100% of unvested | Founders, CEOs |
| Partial acceleration | 50% of unvested | Key executives |
| 12-month acceleration | 12 months of vesting | Senior employees |
| 6-month acceleration | 6 months of vesting | Employees |
| No acceleration | 0% | Default (most employees) |
Termination Provisions
What Happens on Termination
Termination type affects both unvested and vested equity. The treatment differs based on whether termination is for cause, without cause, or due to resignation.
Termination for Cause
- Unvested: Forfeited immediately
- Vested stock: Usually kept
- Vested options: Typically 0-30 days to exercise
- Repurchase rights: May include vested at FMV
- Note: "Cause" must be defined carefully
Termination Without Cause
- Unvested: Forfeited
- Vested stock: Kept (but may have ROFR)
- Vested options: 90 days to exercise (typical)
- Acceleration: May apply (per agreement)
- Note: Often triggers double-trigger if post-CoC
Resignation for Good Reason
- Unvested: May accelerate if defined
- Vested: Same as without cause
- "Good Reason" examples:
- - Material reduction in duties
- - Significant pay cut (>10-20%)
- - Forced relocation (>50 miles)
Post-Termination Exercise Periods
| Termination Type | Standard PTEP | Extended PTEP | Notes |
|---|---|---|---|
| Voluntary resignation | 90 days | Up to 10 years | Extended PTEP increasingly common |
| Termination without cause | 90 days | 6-12 months | May be negotiated |
| Termination for cause | 0-30 days | Rarely extended | Punitive by design |
| Death or disability | 12 months | N/A | Estate can exercise |
| Retirement | 90 days - 3 years | Varies | If defined in plan |
ISOs convert to NSOs if not exercised within 90 days of termination (losing tax benefits).
"Cause" Definition
The definition of "Cause" is critical because it determines whether termination triggers forfeiture of vested equity or shortens exercise periods. Typical definitions include:
- Conviction of a felony or crime involving moral turpitude
- Material breach of employment agreement or company policies
- Gross negligence or willful misconduct in duties
- Fraud, embezzlement, or misappropriation
- Breach of confidentiality or non-compete obligations
- Material dishonesty affecting the company
Negotiate for "cure period" - a chance to fix non-criminal violations before termination is deemed "for cause."
Templates
Standard Vesting Language
4-Year, 1-Year Cliff, Monthly Vesting
VESTING SCHEDULE
The Shares shall vest as follows, subject to the Recipient's Continuous
Service through each applicable vesting date:
(a) Cliff Vesting: Twenty-five percent (25%) of the Shares shall vest on
the first anniversary of the Vesting Commencement Date.
(b) Monthly Vesting: Following the cliff, an additional 1/48th of the
total Shares shall vest on the same day of each month thereafter
(or the last day of such month, if there is no corresponding day),
until all Shares are fully vested on the fourth anniversary of the
Vesting Commencement Date.
(c) No Partial Vesting: Fractional shares shall not vest; any fractional
share shall be rounded down to the nearest whole share, with any
remaining fractional share vesting on the final vesting date.
Vesting Commencement Date: _______________
Total Shares Subject to Vesting: _______________
Double Trigger Acceleration Language
Double Trigger Acceleration Provision
ACCELERATION UPON CHANGE OF CONTROL
(a) Double Trigger. If, within twelve (12) months following a Change of
Control, the Recipient's Continuous Service is terminated either:
(i) by the Company (or its successor) without Cause; or
(ii) by the Recipient for Good Reason;
then [100% / 50% / 12 months] of the then-unvested Shares shall
immediately accelerate and become fully vested as of the date of
such termination.
(b) Definitions.
"Change of Control" means: [define - merger, acquisition, asset sale, etc.]
"Cause" means: [define - see Cause definition section]
"Good Reason" means: [define - pay cut, duties reduction, relocation]
(c) Release Requirement. Acceleration under this Section is conditioned
upon the Recipient's execution and non-revocation of a general
release of claims in a form provided by the Company within [30] days
following termination.
Milestone Vesting Language
Milestone-Based Vesting Provision
MILESTONE VESTING
The Shares shall vest upon achievement of the following milestones,
subject to the Recipient's Continuous Service through each milestone
achievement date:
Milestone 1: [Description]
- Shares Vesting: _____ (___%)
- Criteria: [Specific, measurable acceptance criteria]
- Target Date: _______________
Milestone 2: [Description]
- Shares Vesting: _____ (___%)
- Criteria: [Specific, measurable acceptance criteria]
- Target Date: _______________
ACCEPTANCE PROCESS:
Upon completion of a milestone, Recipient shall provide written notice
to the Company. The Company shall have [15] business days to:
(i) confirm achievement in writing; or
(ii) provide specific written objections.
Failure to respond within such period shall constitute acceptance.
DISPUTES: Any dispute regarding milestone achievement shall be resolved
by [binding arbitration / mutual agreement / CEO determination].
IMPOSSIBILITY: If a milestone becomes impossible to achieve through no
fault of Recipient, the parties shall negotiate in good faith to
establish a substitute milestone of comparable difficulty.