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Vesting schedules: what are the different types and examples
6th Sep 2021
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Vesting schedules: what are the different types and examples - Linkilaw Solicitors
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Share vesting is the process by which an employee, investor, or co-founder is rewarded with shares or stock options but receives the full rights to them over a set period of time or, in some cases, after a specific milestone is hit – usually one that’s established in an employment contract or a shareholders’ agreement. In this article, we will explain further in detail the different types of vesting schedules.  

A vesting schedule outlines when and how an employee becomes entitled to shares or options. Employers use vesting to retain employees and in the case of founders, to protect themselves and avoid giving away shares to employees who don’t deserve it by leaving too early or not contributing to the company’s targets.  

Time-based vesting 

In time-based vesting, the allocation of shares is divided over a set period of time.  

IMMEDIATE VESTING  

With an immediate vesting schedule, the employees receive 100% ownership of their shares at once. Therefore, if the employee leaves the company after getting the shares, these cannot be revoked.  

This plan is rare but it is usually used when an employee has been working for the company for a long time and the employer has the confidence that they won’t be leaving the company in the short run. 

LINEAR VESTING 

In a graded or linear vesting schedule, the employee gets ownership of a percentage of the shares they are offered over a certain period of time.  

For example, during a graded vesting period of four years, the employee would get 25% of the total shares after the first year, then 50% after the second year, 75% after the third year, and 100% after the fourth year.  

In this plan, if the employee leaves the company within the vesting period, he or she will be taking only the percentage accumulated until that moment.  

It also exists the possibility of a reverse vesting plan in which an employee is given all shares upfront but the company has the right to buy back their un-vested shares if he or she leaves early.  

Going back to our four-year vesting period, the employee would receive full ownership of the shares upon signing the contract but he or she would give back a 50% of the shares in the case of leaving in the second year.  

CLIFF VESTING 

Cliff vesting is a period in which shares cannot be awarded before a certain date. When the cliff ends, the respective vesting schedule starts. 

 A common vesting schedule is a one-year cliff followed by four-year linear vesting. The employee wouldn’t get any shares for the first year, but it would gradually get the ownership of the shares over the next four years. If the employee would leave the company before the cliff is over, they wouldn’t receive any shares.  

This plan is very popular among startups so that they can retain their employees as the company grows.  

vesting schedules - cliff vesting

Performance-based vesting 

In performance-based vesting, the allocation of shares is subject to the competition of a certain target like revenue growth or the occurrence of a certain event.  

The main benefit of performance-based vesting is that it secures performance improvement by motivating employees to give their best, and safeguards the interests of the firm.  

However, depending on the case, it may be recommended to combine performance-based vesting with time-based vesting as there may be external circumstances outside the control of a single employee.  

Another alternative may be to combine both types to get the ownership of the shares. In this case, the employee would achieve a certain target and stay a certain period of time before being awarded shares.  

Bottom line 

At Linkilaw Solicitors, we are here to help, share our market knowledge and guide you through key concepts and provisions for your legal documents. 

Book a call with our experienced legal team at a time that suits you.   

Our legal commentary is not intended to be a comprehensive review of all developments in the law and practice. Please seek legal advice before applying it to specific issues or transactions. 

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