When a company offers stock options to employees, it does not hand over all the shares immediately. Instead, the process of becoming fully entitled to these shares happens gradually over time, which is known as vesting.

The most common arrangement for vesting spans four (4) years. However, there is typically a condition called a “one-year cliff,” which means that employees must work for at least one year before earning any shares. Once they reach that milestone, they receive 25% of their stock options. After that, the rest of the shares are divided and awarded evenly each month over the remaining three years. This structure motivates employees to stay longer and remain invested in the company’s growth.

For founders of a company, the story can be a bit different, especially when venture capital investors get involved. Venture capitalists often require founders to also have a vesting schedule for their shares. This is partly to confirm fairness—founders need to stay committed to the company for the long haul—and partly to protect the investors’ interests.

Standard Vesting Clauses

Once the standard vesting arrangement is in place, there is usually also a safeguard known as a repurchase right. This means if an employee leaves before becoming fully vested, the company can buy back those unvested shares at a set price, often whichever is lower between the original cost or the current market value. This facilitates that any unearned equity returns to the company and can be reallocated to other employees or stakeholders.

Over the years, these practices have settled into a familiar pattern. Most early-stage companies stick to a one-year cliff and a four-year total vesting period. This schedule, now considered the industry norm, brings a sense of fairness and predictability to both employees and founders. For employees, it is clear exactly when their share of the pie stops being theoretical and becomes theirs to keep. For founders, it helps maintain balance by preventing large chunks of the company from walking out the door with someone who lost interest after a few months.

Sample Stock Vesting Clause (for illustrative purposes only, not legal advice)

Section [X]: Vesting of Shares

1. Vesting Schedule. The Recipient’s right to ownership of the Shares granted under this Agreement (the “Shares”) shall vest over a total period of four (4) years, subject to the conditions set forth herein. The vesting shall include a one-year “cliff,” followed by monthly vesting thereafter. Specifically, no Shares shall vest for the first twelve (12) months from the Vesting Commencement Date. On the first anniversary of the Vesting Commencement Date, twenty-five percent (25%) of the total number of Shares shall vest. After this initial one-year period, the remaining seventy-five percent (75%) of the Shares shall vest in equal monthly installments over the following thirty-six (36) months, with one thirty-sixth (1/36) of the remaining Shares vesting on the last day of each month thereafter, until all Shares are fully vested at the end of the four-year period.

2. Vesting Commencement Date. Unless otherwise stated in the Recipient’s offer letter or a separate written agreement, the Vesting Commencement Date shall be the Recipient’s first day of employment with the Company or another mutually agreed-upon date set forth in writing.

3. Continuous Service Requirement. Vesting of the Shares is contingent upon the Recipient’s continuous employment or service relationship with the Company or any of its subsidiaries or affiliates. If the Recipient’s employment or service terminates for any reason—whether voluntary or involuntary, and including resignation, termination with or without cause, death, or disability—no further Shares shall vest after the termination date.

4. Repurchase Right for Unvested Shares. In the event of the Recipient’s termination of employment or service for any reason prior to the vesting of all Shares, the Company shall have the right, but not the obligation, to repurchase any and all unvested Shares at a price per Share equal to the lesser of (i) the original purchase price paid by the Recipient, if any, or (ii) the fair market value of such Shares on the date of repurchase, as reasonably determined by the Company’s Board of Directors. The Company may exercise this repurchase right by providing written notice to the Recipient (or, if applicable, the Recipient’s estate) within ninety (90) days of the termination date, and completing the repurchase transaction within thirty (30) days thereafter.

5. Cliff Vesting Provision. During the initial twelve-month cliff period, the Recipient shall not vest in any Shares. If the Recipient’s employment or service terminates prior to the one-year anniversary of the Vesting Commencement Date, the Recipient shall forfeit any and all rights to any Shares that would otherwise have vested on or after that date. If, however, the Recipient remains continuously employed or engaged by the Company through the one-year anniversary, twenty-five percent (25%) of the total Shares shall vest immediately on that date.

6. Acceleration of Vesting [Optional]. In the event of a Change in Control, as defined in the Company’s governing documents, the Company’s Board of Directors may, at its discretion, accelerate the vesting of some or all of the Recipient’s unvested Shares. Any such acceleration of vesting rights shall be documented in a separate agreement or Board resolution and may be subject to additional conditions, such as the Recipient’s continued employment for a specified period post-transaction.

7. Adjustments and Amendments. The Company may, from time to time, adjust the number of Shares subject to this Agreement and/or amend the vesting schedule due to stock splits, reorganizations, or other corporate events, provided that any such adjustments shall be made in accordance with applicable law and shall not unfairly reduce the Recipient’s vested interests without the Recipient’s written consent.

8. No Guarantee of Continued Service. Nothing in this Agreement or the grant of Shares shall be construed as a guarantee of continued employment or service. The Recipient acknowledges that their employment or engagement is “at will” (except as otherwise provided by written contract), and that their status may be terminated at any time, with or without cause, subject to applicable law and any written agreements to the contrary.

Where things can diverge is in how these rules apply to founders versus everyone else. Founders, after all, often pour their time and energy into the business long before it is anything more than an idea scrawled on a whiteboard. When outside investors appear on the scene, they usually want to lock in the founders’ commitment with a vesting schedule, but it’s common for founders to negotiate some kind of “head start.” Often this comes as vesting credit, which treats them as though they’ve already put in a year or more of service. That way, when their shares begin to formally vest, it acknowledges the tough, risk-heavy work they did early on, before salaries were stable or a product even existed.

For regular employees, if they depart before hitting those crucial milestones, their unvested shares return to the company. This replenishes the option pool, making it easier to attract new recruits down the line with the promise of equity. For founders, a similar outcome arises if they leave too soon, except that the unvested shares do not simply return to a general pool. Instead, those shares effectively vanish from the departing founder’s allocation. This, in turn, slightly increases the percentage stakes of everyone else—other founders, employees, and investors—who remain with the company. Known as reverse dilution, this process facilitates that nobody gains or loses unfairly and keeps the overall ownership structure balanced and orderly.

Special Cases and Considerations in Vesting

Even though the founders usually own their shares from day one—the company still treats these shares as if they are subject to a potential buy-back. In other words, instead of waiting for the shares to “vest” like an employee would, the founder’s shares are all there immediately, but the company keeps the right to purchase back any portion that is not considered “earned” if the founder leaves early. The end result is basically the same as vesting: if the founder departs too soon, they don’t keep all their shares. However, the legal setup is different enough that it can affect how taxes are calculated.

There are also alternatives to standard vesting that founders and key employees can explore to protect their positions in the company. For example, they might negotiate for the right to purchase their unvested shares at the same price as the financing round if they leave the company. This protects their stake even if they are no longer actively involved.

Another strategy involves filing what’s known as a Section 83(b) election. This allows individuals to pay taxes on the value of their shares at the time they are granted rather than when they vest. The advantage is that if the company’s value grows significantly over time, they can lock in lower tax rates early on and potentially save a substantial amount by qualifying for long-term capital gains treatment.

The Impact of Mergers and Acquisitions

When a company goes through a merger or acquisition (M&A), it can significantly affect how vesting works. One important aspect to consider is acceleration—this refers to speeding up the vesting process so individuals gain access to their unvested shares sooner than originally planned. Acceleration comes in two main forms: single-trigger and double-trigger.

Single-trigger acceleration instantly vests all remaining shares the moment a company is bought, making it an attractive idea for those holding shares. However, most VC deals prefer double-trigger acceleration. In this setup, two things must happen before the unvested shares are fully vested: the company has to be sold, and the individual must either lose their job without a valid reason or have their role significantly altered. This approach makes sure that key players are motivated to stay and support a smooth handover after the acquisition, rather than simply cashing out and leaving as soon as the deal is done.

The reason double-trigger acceleration is popular is that it finds a fair middle ground. It keeps both founders and employees protected by making sure they do not suddenly lose their potential future gains, but it also satisfies investors and the new owners who come in after the acquisition. From the buyer’s perspective, having some unvested shares still on the table encourages the key people running the company to stick around and work hard even after the sale. If all shares were fully vested right away, the new owner might have to come up with separate plans to keep those important employees motivated, which can make the deal more complicated.

In effect, double-trigger acceleration serves everyone’s interests at once. Founders and employees do not feel short-changed if they are let go after an acquisition, and the acquirer still has a tool to ensure that the company’s team remains committed. Because of these advantages, this structure is common in venture-backed companies, helping maintain a solid balance between rewarding those who built the business and ensuring it can thrive under new leadership.

What Research and Best Practices Show

Over the past two decades, a de facto standard has emerged in the U.S. startup community: four-year vesting with a one-year cliff. This standardization itself is a product of trial, error, and refinement as startups, founders, and investors learned what works best to maintain balance and fairness.

Though formal academic studies on vesting’s direct impact on turnover are limited, anecdotal evidence and survey data from startup ecosystems (for example, “Global Startup Ecosystem” reports) suggest that reasonable vesting schedules help reduce early voluntary departures by aligning personal incentives with medium-term company milestones.

Early legal scholarship and guidance from seasoned startup attorneys frequently emphasize vesting as a mechanism to prevent “dead equity”—equity held by individuals who no longer contribute but still have voting rights and ownership stakes. A balanced vesting schedule mitigates this scenario.

Conclusion

By putting a clear vesting plan in place right from the start, everyone knows what to expect and understands that staying committed over the long run really matters. There is no need to start from scratch—tried-and-true guidelines from respected sources like the NVCA or Y Combinator can give a solid foundation.

Of course, one size does not fit all. The parties can adjust the vesting schedule for certain key players or senior team members, and even speed it up in special situations, making sure it’s fair to everyone involved. When each person’s equity matches the time and effort they have put in, they are not only reducing the chances of conflicts but also fostering a culture where the team works together smoothly.

In the long run, having a clear and fair vesting system will not just keep the team happy and in sync—it can also make the company more attractive to investors and buyers. This means simpler negotiations, better valuations, and an easier time if they ever decide to sell or bring in new partners down the road.