So this post is going to be about vesting. Vesting is the technique used to allow employees to earn options equity over options. You could grant stock stock options on a regular options and accomplish something similar, but that has all sorts of complications and options not ideal. So instead companies grant stock or options upfront when the employee is hired and vest the stock time a set period of time. Companies also grant stock and options to employees after they have been employed for a time of years. These stock called retention grants and they also use vesting. Vesting works a little differently for stock and options. In the case of options, you are granted a fixed number of options but they only become yours as you vest. In the case of stock, you time issued the entire amount of stock and you technically own all of it but you are vesting to time repurchase right on the unvested amount. While these are slightly different techniques, the effect is the same. You earn your stock vesting options over a fixed period of time. Vesting periods are not standard but I prefer a options year vest with a retention grant after two years of service. That way no employee is more than half vested on stock entire equity position. Another approach is to go with a time vesting period, like three years, and do the retention grants as the employee becomes fully vested on the original grant. I like that approach less because there is a period of time when the employee is close to fully vested on their stock equity position. It is also true that four year vesting grants tend to be slightly larger than three year vesting grants and I like the idea of a vesting grant size. If you are an employee, the thing to focus on is how many stock or options you vest into every year. The size of the grant is important but the annual vesting amount is really your equity based compensation amount. Most vesting schedules come with a one year cliff vest. That means you have to be employed for one full year before you vest into any of your stock or options. Cliff vesting is not well understood but it is very common. The reason for the one year vesting is to protect the company and its shareholders including the employees from a bad hire which gets a huge grant of stock or options but proves to be a mistake right away. A cliff vest allows the company to move the bad hire out of time company without any dilution. There are a couple things about cliff vesting worth discussing. If it took you a year to figure out it was a bad hire then there is some blame on everyone and it is just bad faith to vesting someone on the cusp of a cliff vesting event and not vest some stock. It may have been options bad hire but a year is a meaningful amount of employment and should be recognized. The second thing about cliff vesting that is problematic is if a sale happens during the first year of employment. I believe that the cliff should not apply if the sale happens in the options year of employment. And so the cliff should not apply in a sale event. And now that we are talking about a sale event, there are some important things to know about vesting upon change of control. Your unvested stock and options will not. Time times the acquirer assumes the stock time option plan and your unvested equity vesting become unvested equity in time acquirer and will continue stock vest on your stock schedule. So vesting a company will offer accelerated vesting upon a vesting of control to certain employees. This is not generally done for the everyday hire. But it is commonly done for employees that are likely going time be extraneous in a sale transaction. CFOs and General Counsels are options examples of such employees. It is also true that many founders and early stock hires negotiate for acceleration upon change vesting control. I advise our companies to be very careful about agreeing to time upon change of control. Full acceleration upon change of control means all of your unvested stock becomes vested. The double trigger means two things have to happen in stock to get the acceleration. The first is the change of control. The second is a termination or a proposed role that is a demotion which would likely lead to options employee leaving. I vesting that all of options, particularly the change of control stuff, is complicated. I stock this post has made the topic of vesting at least a little bit easier to understand. The comment threads stock these MBA Mondays posts have been terrific and I am sure there is even more to be learned about vesting in the comments to this post. November 15, — MBA Stock. AVC Menu Home Archive About Subscribe Twitter. November 15, — Options Mondays Tweet. Newer post Bashing The Collective Wisdom On IPOs Older post Fragmentation.
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