Vesting Schedules and Cliff Provisions: How Equity Vests for Founders and Employees

Why Vesting Exists: Aligning Incentives with Longevity

Vesting is a requirement that equity recipients stay with the company for a period (typically four years) to fully own their shares. Without vesting, an employee or founder could receive their full equity grant on day one and leave the next day with full value. Vesting solves this problem by tying ownership to tenure. The employee earns their equity gradually, creating incentive to stay. For founders, vesting protects the company if a co-founder departs early. A founder who leaves after six months should not keep their full equity stake. Vesting makes that outcome automatic.

The financial benefit to employees is significant. Vested equity represents real ownership and potential exit value. Unvested equity is essentially worthless if the employee leaves. This makes vesting a powerful retention mechanism. An engineer with 100k unvested options over four years effectively loses those options if they depart year two. This gives companies leverage to retain talent through downturns or slow growth periods.

The Standard Schedule: Four Years with One-Year Cliff

Market standard is a four-year vesting schedule with a one-year cliff. This means the employee receives no vested equity in the first year. After year one (the cliff), they receive 25% of their grant (one year divided by four years). After that, the remaining 75% vests monthly (or quarterly) over the next three years. The mathematical result is 25% after year one, 50% after year two, 75% after year three, and 100% after year four.

The one-year cliff is crucial. It protects the company from early departures. An employee who leaves after six months vests nothing. An employee who leaves after year one vests 25%. This creates a natural retention point. Most employees stay through the cliff because the cliff is a major vesting milestone. After the cliff, monthly vesting means employees gain value gradually, creating ongoing retention incentive.

Some founders propose two-year vests or three-year vests. Two-year vests are rarely accepted by investors; they concentrate too much equity value on short-tenure employees. Three-year vests are negotiable for very early-stage companies with strong founders. Standard market is four years, and founders should use this standard to maintain consistency with investor expectations.

Acceleration Mechanics: Single-Trigger vs Double-Trigger

Acceleration clauses allow unvested equity to vest immediately under certain conditions. Single-trigger acceleration means equity vests if a specific event occurs (change of control, sale of the company, IPO, etc.). Double-trigger acceleration means equity vests if two events occur (change of control and then termination without cause, or change of control and elimination of the role).

Double-trigger is standard and founder-friendly. It means if the company is acquired, employees don't automatically vest everything. Instead, if the acquirer terminates the employee or eliminates their role, then their unvested equity accelerates. This protects employees from being acquired and then fired without retaining upside. Single-trigger is rare and very employee-friendly; it means just the acquisition triggers acceleration regardless of whether the employee stays. Investors typically resist single-trigger acceleration because it creates perverse incentives to sell the company early.

Acceleration percentages vary. Some offers include 25% acceleration (one-time vest of 25% of unvested shares). Some include 50% acceleration (vest half the remaining unvested shares). Some include full acceleration (100% of unvested shares vest). Market standard for Series A employees is 25% acceleration on change of control with double-trigger. Founders should negotiate double-trigger acceleration at minimum, and push for higher percentages (50%+) if possible.

Good Leaver vs Bad Leaver Provisions

Good leaver and bad leaver provisions determine what happens to unvested equity when an employee departs. A good leaver is someone who leaves for benign reasons (they quit for another job, they're terminated without cause, or the company performs a layoff). A bad leaver is someone who quits with minimal notice, is terminated for cause (theft, misconduct), or violates non-compete agreements. Some agreements also classify departures due to injury or death as good leaver events.

For good leavers, the company typically allows purchase of vested equity at fair market value (determined by the 409A valuation). The employee walks away with their vested shares. For bad leavers, the company may repurchase vested shares at a discount or at cost, or allow forfeiture. The difference is material. An engineer who worked for three years and vested 75% of 100k options has 75k shares. If those shares are worth £1 per share (based on 409A), those shares are worth £75k at good leaver terms or potentially zero at bad leaver terms.

Most founders do not negotiate good leaver vs bad leaver terms until an employee actually departs. This is a mistake. Document the policy in the option grant agreement at the outset. Make clear what constitutes good leaver vs bad leaver. Consistency matters because employees will compare their treatment to peers. A transparent policy protects the company from accusations of unfair treatment.

Founder Vesting and Co-Founder Protection

Founders typically vest their shares to align with investors and set consistency. A founder who holds 50% of the company but vests over four years ensures they share the same retention incentive structure as employees. This is important for investor confidence. Investors want to know that founders are not taking their share and running if the company faces challenges. However, founder vesting can be negotiated differently than employee vesting.

Many early-stage companies use four-year vesting for founders with a six-month or one-year cliff instead of the standard one-year. This reflects the reality that founders have already invested significant time before incorporation. A six-month cliff means founders vest 12.5% at the six-month mark. This reduces the risk that a co-founder departure results in complete equity loss. If a co-founder leaves after three months (before any cliff), they have contributed minimal time and forfeiting their equity is reasonable. If they leave after six months (past the cliff), they retain 12.5% as recognition of early contribution.

Co-founder agreements should specify vesting terms explicitly and include buyout provisions for departing founders. A typical buyout clause allows the company to repurchase a departing founder's unvested shares at fair market value, with the remaining vested shares either retained or subject to a buyback at cost (unfavourable to the founder). This protects remaining founders from dilution if a co-founder leaves before significant vesting.

Advisor Vesting and Extended Schedules

Advisors typically receive smaller equity grants (0.1-0.5%) with faster vesting. Common patterns are one-year vesting with a three-month cliff, or two-year vesting with no cliff. Advisors provide value over shorter timeframes than employees, so longer vesting periods are not justified. One-year vesting with a three-month cliff is appropriate for advisors who attend monthly board meetings and provide strategic guidance. Two-year vesting with no cliff is appropriate for limited advisors who provide occasional input.

Some founders skip vesting for advisors entirely, granting fully vested shares immediately. This is not recommended unless the advisor is genuinely active and taking significant personal risk (co-investing or introducing major customers). Vesting protects against advisors collecting shares and then disappearing.

Modelling Vesting and Exit Scenarios

Founders often fail to model how vesting affects equity value in different exit scenarios. An employee hired at Series A with £100k options over four years will have vested different amounts at different exit times. If the company exits after two years (year two post-hire), the employee has vested 50% of their options (£50k value). If the company exits after three years, they have vested 75%. If the company exits after four years, they have vested 100%. Create a spreadsheet that models vesting by hire date and exit timing. This shows employees exactly what their equity will be worth under different scenarios and helps you communicate expected value transparently.

Related Reading

For option pool mechanics and sizing, see Employee Option Pools in SaaS: Size, Structure, and How to Avoid the Option Pool Shuffle. For cap table mechanics, read SaaS Cap Table Dilution: How to Calculate and Model Ownership. For exit planning, explore SaaS Exit Waterfall: How Proceeds Are Distributed When You Sell Your Company.

Key Takeaways

• Vesting aligns incentives by spreading equity grants over time
• Standard schedule is four years with one-year cliff: 25% vests at year one, then monthly vesting over three years
• Double-trigger acceleration protects employees in acquisitions (change of control plus termination)
• Good leaver vs bad leaver provisions determine equity treatment on departure
• Founders should vest to align with investors, typically four years with six-month to one-year cliff
• Co-founder agreements must include cliff provisions and buyout clauses for departing founders
• Advisors typically vest over one-two years, faster than employees, reflecting shorter engagement periods