Glossary
What Is Vesting?
Updated · Team Fonda
Short answer
Vesting is the process of earning ownership of your shares gradually over a set period instead of receiving them all at once. If you leave the company before the period ends, you keep only the part that has vested.
Key takeaways
- A vesting schedule has a length, a start date and often a cliff, which is a date before which nothing vests.
- Stripe Atlas describes four years with a one-year cliff as the setup most founders choose.
- Vesting protects the people who stay when a co-founder or early hire leaves.
- Agree vesting when you split equity, while everyone is still on good terms.
What vesting means in plain words
When founders split a company, each person is promised a block of shares. With vesting, that block is earned month by month by continuing to work on the business. Shares you have earned are vested and are yours. Shares you have not earned yet are unvested, and the company can usually take them back if you leave.
Vesting applies to founders, to employees who receive stock options and often to advisers. The idea is the same in each case: equity is pay for future work, so it arrives as the work is done.
How a vesting schedule works
- Vesting period: the total time it takes to earn everything.
- Cliff: an initial stretch during which nothing vests. Leave before the cliff date and you get no shares. Reach it and the shares for that whole stretch vest at once.
- Vesting start date: the day the clock starts, often the date the company is incorporated.
- Frequency: how often shares vest after the cliff, commonly monthly.
According to Stripe Atlas's guide to founder equity terms, most founders set up a four-year vesting period with a one-year cliff, with shares vesting monthly. On that schedule, 25% vests on the cliff date and the rest vests in equal monthly steps.
Formula (monthly vesting with a cliff)
Before the cliff: vested shares = 0. From the cliff onward: vested shares = total shares x (months worked / months in the vesting period).
You can build your own schedule month by month in the free vesting schedule calculator.
A worked example
These numbers are made up to show the mechanics. Say you are granted 2,400,000 shares on a four-year schedule with a one-year cliff and monthly vesting. That is 50,000 shares for each month worked.
| If you leave after | Shares vested | Share of your grant |
|---|---|---|
| 8 months | 0 | 0% |
| 12 months | 600,000 | 25% |
| 30 months | 1,500,000 | 62.5% |
| 48 months | 2,400,000 | 100% |
Example only. Your own documents set the real terms.
Why vesting matters for a first-time founder
You meet vesting at the moment you find a co-founder and decide who gets what. Without it, a co-founder who leaves after three months walks away with their full share and does no more work. The people who stay then build value for someone who is gone, and the departed founder's stake sits on the cap table where new hires and investors can see it.
You meet it again when you raise money. Investors generally expect founder shares to vest, and vesting terms often appear in a term sheet. Setting it up yourself early is simpler than having it imposed later. The co-founder equity split calculator can help with the split itself, and Fonda's journey has a Legal and setup step in the Launch phase, which is a sensible point to settle it.
Common mistakes
- Skipping vesting because you trust each other. Vesting is not about distrust. It covers illness, family changes and plain loss of interest.
- Leaving it as a verbal agreement. Vesting only works if it is written into signed documents.
- Forgetting acceleration. Acceleration means some or all unvested shares vest early on an event such as a sale of the company. Decide whether you want it and write it down.
- Ignoring tax. In some countries the way you receive shares that vest has tax consequences with short deadlines. Rules differ by country, so ask a tax adviser when you set vesting up.
- Giving advisers a founder-sized schedule. Match the schedule to how long you expect the person to contribute.
Related terms
Vesting decides how many shares each person truly owns at a point in time. Equity dilution decides what percentage those shares represent after new shares are issued. You need both to read a cap table correctly.
Frequently asked questions
What is a vesting cliff?
A cliff is a date before which no shares vest. If you leave before it, you receive nothing. On the cliff date, the shares for the whole waiting period vest at once, and regular vesting continues from there.
Do founders need vesting on their own shares?
It is not required by a universal rule, but it is widely used and investors generally expect it. It protects each founder from the other leaving early with a full stake.
What happens to unvested shares when someone leaves?
In most setups the company has the right to take them back or buy them back, often at the low price originally paid. The exact mechanism depends on your documents and local law, so check with a lawyer.
What is the difference between single-trigger and double-trigger acceleration?
Single-trigger acceleration vests shares early when one event happens, usually a sale of the company. Double-trigger needs two events, usually a sale followed by the person losing their job. Which one applies, if any, is set in your agreement.