Equity vesting and cliffs. How equity gets earned over time.
Equity vesting is the mechanism by which equity is "earned" over time. If you leave before fully vesting, the unvested portion returns to the company. This applies to founders, employees, advisors, and contractors. The standard structure is 4-year vesting with a 1-year cliff, originating from Silicon Valley but now universal. This guide explains the mechanics, the 83(b) election critical for tax planning, and what acceleration provisions mean.
Start here.
4-year vesting with 1-year cliff. 25% vests at year 1, then 1/48th per month for 36 months.
The 1-year cliff means nothing vests for the first 12 months. If you leave before month 12, you get zero.
Investors require founder equity to be subject to vesting. Without it, a founder could leave week 2 with full equity.
File within 30 days of receiving restricted stock to elect tax treatment at grant rather than vesting. Critical for early-stage equity.
Single trigger: equity vests immediately on acquisition. Double trigger: equity vests if acquired AND terminated. Double trigger is standard.
The full picture.
Vesting basics
Equity granted but subject to vesting is "restricted." The recipient owns the shares but the company has the right to repurchase unvested shares at the original price if the recipient leaves. As time passes (vesting), the company's repurchase right falls away on the vested portion.
4-year vesting with 1-year cliff
25% vests at the one-year mark (the "cliff"). Remaining 75% vests monthly over the next 36 months (1/48th of total per month). Standard for almost all venture-backed startups, employees, advisors, and post-investment founder grants.
Why the cliff
Protects against turnover in the first year. New hires who do not work out get no equity. If equity vested gradually from day 1, the company would constantly clean up tiny equity stakes from short-term hires.
Founder vesting
Pre-investment: founders typically have no vesting (they already own their shares). Post-investment: investors require founder vesting on existing shares. Common structure: existing founders subject to 4-year vesting from incorporation date, with some pre-vesting credit for time already worked.
83(b) election
Restricted stock has a tax wrinkle: ordinarily, you owe tax as shares vest based on fair market value at vesting (not grant). For founder shares granted near-zero value, the tax bill could be enormous if FMV at vesting is much higher. Section 83(b) election filed within 30 days of grant elects to be taxed at grant (when value is near zero). All future appreciation taxed as capital gain at sale.
Single trigger acceleration
Equity vests immediately upon acquisition. Founder-friendly but acquirer-unfriendly (acquirer wants the team locked in post-close). Used sparingly for founders.
Double trigger acceleration
Equity vests if BOTH (a) the company is acquired AND (b) the recipient is terminated without cause within X months after the acquisition. Standard for senior employees and post-Series-A founders. Aligns founder interests with both completion of deal and post-close retention.
Re-vesting on acquisition
If acquirer wants to lock in the team, founder/key employee unvested equity may "re-vest" on new schedule post-acquisition. Typically combined with single or double trigger acceleration on the original schedule.
Common mistakes
(1) Missing 83(b) election: 30-day window from grant. Missing it can cost six figures in tax. (2) No founder vesting: investors will require it; better to set up at incorporation. (3) Acceleration absent: founders lose negotiating use with acquirers without acceleration provisions.
Common questions.
What does "vesting" mean?
What is a 1-year cliff?
Why do founders need vesting?
What is an 83(b) election?
What is the difference between single and double trigger acceleration?
What if I do not file 83(b) in time?
Can vesting accelerate before acquisition?
What happens to my unvested equity if I leave?
How long is the standard vesting period?
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This guide is educational. Funding decisions require professional advice from licensed attorneys and CPAs.
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