What Is Vesting? Vesting Schedules and Cliffs Explained

Vesting is the process by which a person earns full rights to equity over time or on hitting conditions. A grant of 48,000 options or shares on paper doesn't mean the holder owns or can exercise all of them on day one. They become the holder's, bit by bit, as the vesting schedule says. Until then, they're unvested and can generally be taken back if the person leaves.

The point is to tie ownership to commitment. A company that hands out equity wants the recipient to stick around and build value, and a vesting schedule is the mechanism that makes that trade explicit. Y Combinator's founder guide puts the logic bluntly: without vesting, someone could own half of a company on paper and still walk away with nothing if they leave in the first year, which is exactly what a schedule is designed to prevent.

This is reference material, not legal or tax advice. Plans, tax rules and securities law vary by company, deal and jurisdiction, so have counsel and a tax adviser review any real grant.

The Basic Parts of a Vesting Schedule

Every schedule is built from a few pieces:

• Grant. The total number of options, shares or units being awarded.
• Vesting commencement date. The date the clock starts. It's often the start date or the grant date, but the grant agreement decides.
• Vesting period. How long it takes to earn the whole grant.
• Cliff. A waiting period before anything vests.
• Vesting interval. How often additional equity vests after the cliff (usually monthly, sometimes quarterly).

The Four-Year Schedule With a One-Year Cliff

The most common startup convention is a four-year schedule with a one-year cliff. WilmerHale's startup practice describes it as four-year vesting with a one-year cliff, so 25% vests after one year, followed by month-to-month vesting for the remaining three years. Y Combinator describes the same shape and says that after the cliff a founder earns an additional 1/48th of their total stock each month. Both pieces are written about founder stock, and employee grants often follow a similar pattern, but each company's plan and grant agreement sets the real terms.

What the Cliff Does

The cliff is a hard stop at the front of the schedule. Someone who leaves in month eleven vests nothing. At month twelve, a quarter of the grant vests in one step. From then on, one forty-eighth vests each month.

An Illustrative Schedule

The numbers below are made up to show the arithmetic. They're not data from any real company. Assume a grant of 48,000 options on a four-year schedule with a one-year cliff and monthly vesting afterward.

After the cliff, 1,000 options vest each month (48,000 divided by 48). So someone who leaves after 30 months has 30,000 vested options, and the remaining 18,000 are unvested.

Other Schedule Shapes

The four-year, one-year-cliff pattern is a convention, not a rule. Companies adjust it for different reasons.

Milestone vesting is harder to administer, because someone has to decide whether the goal was met. A time-based schedule is simpler, which is a big reason it's the default.

Key Facts: Vesting

• Vesting is the process of earning equity over time or on conditions, and unvested equity can generally be recovered by the company on departure.
• A common convention is four years with a one-year cliff: 25% at one year, then monthly vesting for the remaining three years (WilmerHale).
• After the cliff, a founder earns 1/48th of their total stock each month (Y Combinator).
• An 83(b) election must be filed not later than 30 days after the property is transferred (26 CFR 1.83-2).
• Double-trigger acceleration is the more investor-friendly form and has become very popular with early-stage companies (Cooley GO).
• In the illustrative 48,000-option grant above, someone leaving at month 11 vests nothing and someone leaving at month 12 vests 12,000.

Founder Vesting vs Employee Vesting

Founders usually hold actual shares from the start, not options. When investors come in, they often ask that founder shares become subject to vesting, even though the founders already own them. This is sometimes called reverse vesting: the founder owns the shares outright, but the company holds a right to buy back unvested shares if the founder leaves. WilmerHale's guide describes the company's right to repurchase unvested shares at their original issuance price upon termination of employment.

Employees typically receive options or restricted stock units that start unvested and vest forward in time. The practical effect is similar, though the legal mechanics and tax treatment differ. For how founder splits and schedules interact, see founder equity.

Vesting for Options, RSUs and Restricted Stock

The vehicle changes what vesting means:

• Stock options. Vesting gives the holder the right to exercise, meaning buy shares at the strike price. Unvested options can't be exercised. See the employee option pool for how options are reserved and priced.
• Restricted stock. The person holds the shares, but they're subject to forfeiture or repurchase until vested. This is where the 83(b) election comes in.
• Restricted stock units (RSUs). A promise to deliver shares (or their cash value) when vesting conditions are met. For the differences in detail, see stock options vs RSUs.

Acceleration: Single and Double Trigger

Acceleration changes the schedule so that some or all unvested equity vests early on a defined event. Cooley GO defines single-trigger acceleration as partial or full acceleration based on the occurrence of a single event, and double-trigger as requiring two events, most commonly a company sale plus the employee's involuntary termination within a set period afterward.

Cooley GO notes that investors generally dislike single-trigger acceleration on a sale because it can deter acquirers, who want to retain key employees. It also flags a limit of double-trigger: it only helps if the acquirer actually assumes or continues the underlying awards, which doesn't always happen. WilmerHale likewise calls double-trigger acceleration typically the most appropriate approach for founder stock. In an acqui-hire, where the buyer wants the team, how unvested equity is treated is often a central part of the negotiation.

What Happens When Someone Leaves

Departure triggers three separate questions:

1. Unvested equity. Unvested options usually terminate and return to the pool. Unvested restricted stock is generally subject to the company's repurchase right.
2. Vested options. The holder typically has a limited window after leaving to exercise them, set by the plan and grant agreement. If they don't exercise in time, the options expire.
3. Tax status of options. For an incentive stock option to keep its special tax treatment, the statute requires the holder to have been an employee at all times from grant until three months before exercise. Section 422(a)(2) of the tax code sets that three-month period, and 422(c)(6) extends it to one year for a disabled employee. After that, the option is generally treated as a nonstatutory option.

Many plans use a 90-day exercise window to line up with the three-month rule, but longer windows exist, and the grant agreement is what controls.

The 83(b) Election

When someone receives restricted stock that's subject to vesting, the default tax rule is that they're taxed as the shares vest, on the value at that time. An 83(b) election lets them choose instead to be taxed at the time of transfer, on the value then, even though the stock is still unvested. The regulation, 26 CFR 1.83-2, requires the election to be filed not later than 30 days after the date the property was transferred. WilmerHale's guide also tells founders to make the election within 30 days of the restricted stock grant.

The 30-day window is strict, and a missed deadline can't generally be fixed later. It applies to restricted stock, not to ordinary option grants. Whether to file, and what it costs, depends on the stock's value and the person's situation, so this is a question for a tax adviser.

Vesting Outside the US

Vesting as a concept is global, but the tax, employment and securities rules around it aren't. Some countries tax equity at vesting, others at exercise or sale, and some limit how unvested awards can be forfeited. The US rules above (ISOs, 83(b)) don't apply elsewhere, so get local advice before applying any of this to an international team.

Common Mistakes

• Skipping the 83(b) deadline. Thirty days is short, and it runs from the transfer, not from when someone notices.
• Assuming the cliff is optional or negotiable after the fact. The schedule lives in the grant documents, so read them before accepting.
• Ignoring the exercise window. Vested options can expire unused after departure.
• Forgetting that acceleration needs a buyer who assumes the awards. A trigger doesn't help if the awards are cancelled in the deal.
• Leaving vesting off the founder deal. Unvested founder shares protect the remaining team if a co-founder leaves early.

How It Relates to Other Terms

• Cap table. Shows granted, vested and unissued equity in one place.
• Equity dilution. Grants and refreshes dilute existing holders as they're issued.
• Term sheet. Investors often set founder vesting and pool terms here.

Related Reading

• What Is Founder Equity?
• What Is an Employee Stock Option Pool?
• Stock Options vs RSUs
• What Is a Cap Table?
• What Is Equity Dilution?
• What Is a Term Sheet?
• What Is an Acqui-Hire?