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Vesting Schedule

What is vesting schedule?

A vesting schedule is a timeline that determines when an employee (or founder) gains full ownership of company-provided benefits, such as stock options, restricted stock units (RSUs), or retirement contributions. Until fully vested, the individual does not have the right to sell or transfer those benefits.

Why it Matters?

Vesting schedules are commonly used by startups and companies to:

  • Retain talent by rewarding long-term commitment
  • Protect the company if someone leaves early
  • Align employee interests with company performance and growth

Common Types of Vesting Schedules

1. Cliff Vesting

  • Nothing vests until a certain period (the cliff) is completed.
  • Example: A 1-year cliff means the employee gets 0% of the shares for the first year, and 100% (or the first chunk) after that.

2. Graded (or Linear) Vesting

  • Shares or benefits vest gradually over time.
  • Example: 25% of shares vest each year over 4 years.

3. Hybrid: Cliff + Graded

  • Common in startups.
  • Example: 1-year cliff + monthly vesting over 3 additional years (i.e., 25% after 1 year, then the remaining 75% monthly for 36 months).

Example

A startup grants an employee 1,200 stock options on a 4-year vesting schedule with a 1-year cliff:

  • Year 1: 0 shares vest until the cliff ends → then 25% (300 shares) vest.
  • Year 2 to Year 4: Remaining 900 shares vest monthly or quarterly.

If the employee leaves after 18 months:

  • They only get the 300 shares + a portion of the 900 (depending on exact timing).

Accelerated Vesting

Sometimes vesting speeds up due to special events, like:

  • Acquisition of the company
  • Termination without cause

This is called “accelerated vesting”, and it’s usually defined in the agreement.

In the Indian Context

  • ESOPs (Employee Stock Option Plans) in India are governed by SEBI guidelines for listed companies.
  • Indian startups often follow a 4-year vesting with a 1-year cliff.
  • Vesting ensures that founders and early employees stay committed during critical growth phases.

Benefits of Vesting Schedules

  • Encourages loyalty and long-term commitment
  • Aligns employees with the success of the company
  • Reduces risk of giving equity to those who leave early