Vesting – What are Vested Options and Schedules?

Vesting is an important aspect of equity grants in which companies offer equity to their key employees as a part of their compensation package. Vested stock options must vest before employees can monetize them. Vesting is the process of earning the stock, whereby the employee receives ownership of the stock over a fixed period of time or after the company hits a milestone.

In India, ESOPs can only be granted to full-time employees, and not to part-time employees, advisors, or consultants, who can be granted non-statutory stock options. ESOPs cannot vest in the employee within one year of their granting, as there is a mandatory one-year cliff.

There are different types of vesting schedules: Uniform Vesting, Bullet Vesting, and Performance-Based Vesting.

Uniform Vesting

Uniform Vesting refers to an employee receiving a percentage of their grant over a fixed period of time. For example, if an employee is granted 10,000 options with 25% of them vesting per year for four years, the employee will have the right to exercise options and have the right to buy 2,500 shares after one year from the option grant date.

Bullet Vesting

Bullet Vesting is a process that founders can look at if the grant of promised ESOPs gets delayed. Bullet vesting can be done after the ESOP paperwork gets approved. Essentially, bullet grants work in a single shot, and vesting is not staggered but completed in one instance itself.

Performance-Based Vesting

Performance-Based Vesting is a plan that can attract top talent as well as act as a sop to get the best out of employees. It is tied to the performance of the employee or the company and keeps employees on their toes to give their best to the company to achieve the conditional predetermined goals.

It is important for employees who have received an options grant to carefully read through the company’s ESOP scheme document, grant letter, etc. to understand their rights and restrictions. The ESOP plan decides how and when the owners and employees gain access to or keep their shares. Founders should also note that the vesting of options cannot take place unless all the ESOP related paperwork such as scheme documents, vesting schedule, and board/AGM approvals are in place. Typically, an ESOP pool itself is created only after the first funding round, and it’s from this pool that the actual vesting of grants can take place.

FAQ

Q: What is vesting schedule for a startup?

A: A vesting schedule for a startup is a plan that outlines when and how startup employees will earn ownership of their equity grants, such as stock options. Typically, equity grants vest over a fixed period of time or after the company achieves specific milestones.

Q: What is an example of vesting?

A: An example of vesting is when a startup employee is granted 10,000 stock options with a 4-year vesting schedule and a 1-year cliff. This means that the employee must remain with the company for at least 1 year before any of the options vest. After the cliff, the employee’s options will vest at a rate of 25% per year over the next 3 years.

Q: What does a 5 year vesting schedule mean?

A: A 5 year vesting schedule means that it will take 5 years for an employee to earn full ownership of their equity grant. Typically, equity grants will vest over a period of time or upon the achievement of certain milestones. For example, if an employee is granted 1000 stock options with a 5 year vesting schedule and 1 year cliff, it means that the employee will earn 20% of the stock options after 1 year and then 1/60th of the remaining stock options every month for the next 4 years.

About the Author

Darshana Chauhan

Senior Associate | darshana.c@treelife.in

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