Vesting

An early-stage company is short on cash. It cannot match market salaries, so it makes up the gap with equity: less money now, a share of the company if it grows.

That arrangement had a hole in it from the beginning. Transfer the shares on the day somebody joins and those shares stay theirs even if they leave three months later. This happened often enough to become a standard cautionary tale. A cofounder starts with 20 percent, quits after six months, and the people who remain spend the next five years building the company. Twenty percent of everything they build belongs to the person who stayed half a year.

The damage does not stop at unfairness. At the next funding round an investor reads the shareholder register and stops on exactly that line. A large stake held by somebody who no longer works there shrinks what is available for the people still to be hired, and the company cannot get it back by asking nicely.

Vesting separates the promise from the transfer using time. The total is agreed when the offer is signed, and the moments at which portions of it actually become the recipient's are spread across the period worked. Equity only functions as a reason to stay when this structure is attached to it.

Fix the total and the period, define how long it takes before the first portion lands, decide the rhythm after that, and write it all down.

1. Fix the total and the period. Four years is effectively the standard. Grant 4,000 shares over four years and roughly 83 shares vest each month.
2. Define when the first portion lands. Requiring a full year before anything vests is the common choice. That stretch is called the cliff, and how it behaves is covered separately.
3. Decide the rhythm. After the first portion, shares can accrue monthly or quarterly. Quarterly is easier to administer; monthly feels more real to the person receiving it. Either way the rhythm should match whatever the grant ledger is actually updated on.
4. Document it. Each person gets an individual grant agreement, and at the company level the shares come out of the option pool with a record of who was allocated what. Stock options also need board approval and a shareholder resolution.
5. Track it and tell people. Somebody should be able to see how many shares have vested so far and how much time remains. Without that, equity exists only during the offer negotiation and plays no part afterward, which wastes the main thing it was supposed to buy.
6. Write down what happens on departure. Unvested shares lapse, and vested ones have to be exercised inside a fixed window. Ninety days is a common window, and vested shares disappear too once it closes.
7. Set the rule for an acquisition. Some agreements accelerate everything to fully vested if the company is sold. The common shape requires two conditions — a sale and a departure together — rather than the sale alone.

The structure fits where a company takes several years to grow and cannot cover compensation in cash during that stretch. If contribution accumulates over years, compensation that accumulates at the same pace is easier for both sides to accept.

There are four limits.

1. Uncertain value weakens the incentive. A right to buy at $4 a share is worth nothing if the price sits below that. Four years can pass with nothing left at the end, and a company that does not say so at the offer stage creates a trust problem later.
2. It loses all force on the person who has finished. With nothing unvested left there is nothing holding anyone. Companies handle this with a refresh grant in year four, which requires that the option pool still has shares in it. Discovering the pool is empty in the same quarter three senior people finish vesting is a bad sequence to be in.
3. Separate exercise conditions may apply. Local rules often attach their own minimum service requirement before options can be exercised at all — commonly two years from grant — which sits on top of the vesting schedule rather than inside it.
4. The retention effect only exists while the price is rising. When a company stalls, vested shares accumulate and people stop doing the arithmetic, and at that point base salary and the actual work are the whole picture again.

"This offer is 4,000 shares, four-year vesting, one-year cliff."

The standard one-line form: total, period, first vesting point.

"You were here two years, so 2,000 shares are vested. The rest lapses."

Separating vested from unvested at departure.

"Three people have finished vesting and nobody issued refresh grants. Check the pool first."

A warning that the retention mechanism has expired.

Pagedeck gave equity to its first five people with no vesting attached. During Series A diligence, the investor read the shareholder register and asked about that before anything else — and one of the five had already left.

Grace re-papered the arrangement with the four who remained, treating time already served as vested and putting the remainder on a fresh four-year schedule. The shares held by the person who left could not be recovered. After that, Mia built a grant ledger showing each person's total, vested amount and remaining period, refreshed every quarter.

The most common assumption is that vested shares can be sold. "It's mine now" sounds like having it in hand. Vesting means the right exists; turning it into money is a separate question. Shares in a private company are hard to find a buyer for, and articles of association or shareholder agreements often restrict transfers outright. The point at which vested equity becomes cash is usually an event at the company level — an acquisition or a listing. Secondary sales to existing investors happen, but they need company consent and are not something a holder can arrange alone.

The other misreading is that a vested stock option automatically becomes stock. Vesting and acquiring get pictured as one step. A stock option is a right to buy at a set price, so after vesting there is still a purchase to make with real money. A right to 5,000 shares at $4 requires $20,000, and tax questions arrive at the same moment. The exercise window also expires, so people do lose vested value by not checking that deadline on their way out.