Vesting Schedules Protect Company Equity

I’ve written about how important finding a co-founder is for entrepreneurs. But equity (company ownership) is a big concern. Specifically, what happens if things don’t work out? If one founder isn’t pulling their weight, do they own as much of the company as they would if they were contributing mightily?

It’s a valid concern. But there’s a simple tool to mitigate it: a vesting schedule. A vesting schedule outlines when each person’s equity is theirs, free and clear. Keep in mind that equity should be earned, not granted, for early employees and founders. The vesting schedule is a great tool to set expectations about equity.

The most common vesting schedule is time-based. You typically see a four-year schedule with a one-year cliff. What does this mean? No equity vests until after a year of employment. If someone leaves in month eleven, they receive zero equity. On their one-year anniversary, 25% of their equity will vest (they stayed for one of four years, or 25% of the four-year schedule). After that, their equity vests in equal monthly increments until the forty-eighth month.  Carta has a good article with details and examples.

At CCAW, we used a milestone-based vesting schedule with revenue as our milestone. As we reached certain revenue targets (while maintaining profitability), equity for leaders would vest. We had a minimum revenue threshold (i.e., cliff) the company had to hit before any equity vested. This schedule was very helpful because everyone was aligned. Our approach was specific to what we were trying to accomplish at the time and may not work for everyone.

Many investors will want to see that founders are on some sort of vesting schedule, which ensures that they’re committed to building the company. There are lots of details that I won’t get into, but the takeaway is that founders should have a vesting schedule (in some form or fashion) if they’re raising investor capital.

A vesting schedule is a great way to protect against someone who isn’t contributing having equity in a company. Finding a co-founder is hard, but vesting schedules overcome one hurdle.