Equity & vesting: Earning Your Stake

Joining a startup often means the opportunity to earn equity – a stake in the company's future success. It's a powerful incentive, but understanding how equity works, particularly the concept of vesting, is essential. Vesting ensures that equity is earned over time, aligning your founders, employees, contractors and advisors interests with the company's long-term growth.

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Time-Based Vesting: The Steady Climb

Time-based vesting is the most standard model. You earn a portion of your equity over a defined period, typically four years. Often, this includes a one-year cliff. The cliff acts as a probationary period; if you leave the company before completing one year of service, you may be forfeiting all of your equity, as it has not yet been earnt. After the cliff, your equity vests gradually over a certain period of time. This structure rewards consistent contributions and commitment.

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Milestone-Based Vesting: Achieving Targets

Milestone-based vesting ties equity ownership to the achievement of specific, pre-determined goals. These milestones could include launching a new product, securing a round of funding, or reaching a specific revenue target. While effective for motivating progress towards key objectives, milestone-based vesting can be more complex to define, measure, and administer fairly.

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Why Vesting Matters

For founders, understanding vesting is equally critical, although from a different perspective. While you may be granting equity to employees, your own equity may also be subject to a vesting schedule. This might seem counterintuitive, but it's a crucial element of good governance. Vesting your own shares reinforces your commitment to the long-term vision of your company and aligns your interests with those of your investors. It also protects the company in unforeseen circumstances, such as a founder's departure, ensuring that equity is tied to continued contribution. A well-structured vesting schedule for founders demonstrates professionalism and strengthens investor confidence. It's a foundational element for building a sustainable and successful venture.