A vesting schedule is the timeline that determines when a person earns outright ownership of equity, shares, or options they've been granted. The grant itself doesn't hand over the asset immediately. Vesting schedules make ownership conditional on something, usually time served, and sometimes performance milestones. For anyone joining a startup, receiving employee share options, or co-founding a company, understanding how vesting works is not optional.
Why vesting schedules exist
The core purpose is alignment. A company grants equity to attract and retain talent, but handing over shares on day one removes the incentive to stay. Vesting schedules solve that by tying ownership to contribution over time. If a co-founder leaves after six months, a vesting schedule ensures they don't walk away with 25 per cent of the company they barely built.
Investors insist on vesting for founders just as much as founders insist on it for employees. It protects everyone at the table. A founding team where one person can exit with full equity and no further obligation is a serious red flag when raising money. Understanding this dynamic matters as much as understanding how a cap table records ownership stakes, because vesting schedules determine what's actually on that table at any given time.
The standard structure: four years with a one-year cliff
Most equity grants in Australia and globally follow a four-year vesting schedule with a one-year cliff. The cliff is the first big threshold. Before the one-year mark, the employee or founder owns nothing. At exactly twelve months, they receive 25 per cent of their total grant in one go. After that, the remaining 75 per cent vests monthly over the next three years, usually in equal instalments.
So for a grant of 40,000 options:
- At twelve months: 10,000 options vest (the cliff)
- Months 13 to 48: roughly 834 options vest each month
- At 48 months: fully vested
The cliff protects the company from someone joining, collecting equity, and leaving within a few months. The monthly vesting after that keeps people engaged for the full term without punishing those who stay.
Accelerated vesting: what happens during a sale or termination
Standard schedules have exceptions. Two acceleration triggers come up repeatedly in term sheets and employment agreements.
Single-trigger acceleration means vesting speeds up on one event, usually an acquisition or company sale. If the company is bought, unvested equity vests immediately. This protects employees who might be made redundant post-acquisition before their schedule completes.
Double-trigger acceleration requires two events to trigger acceleration: typically an acquisition and then a termination or significant role change within a set period afterward, often twelve months. This is now more common than single-trigger, because acquirers dislike buying a company where every employee immediately becomes fully vested and has little reason to stay.
How these triggers are written matters enormously. A term sheet that includes generous acceleration clauses can be worth more to a founder than the face value of the equity grant suggests.
Cliff vesting vs. graded vesting
Not every schedule follows the four-year model. Two broad categories describe how vesting actually unfolds.
Cliff vesting means nothing is owned until a specific date, then everything (or a large tranche) vests at once. The one-year cliff described above is a partial cliff: 25 per cent vests on the cliff date, then the rest vests gradually. A pure cliff would vest 100 per cent on a single future date, which is rare outside specific bonus structures.
Graded vesting releases ownership in stages over time, usually monthly or annually. It's the most common form because it creates a steady, ongoing incentive rather than a single payday. Many Australian companies using the Employee Share Scheme framework under the ATO's Employee Share Scheme rules operate on graded vesting, with tax implications tied to when shares or options become exercisable.
Reverse vesting for founders
Founders often assume they own their shares outright from the start. That's frequently not what investors want. Reverse vesting applies a vesting schedule retroactively to founder shares that were already issued. The shares are legally owned, but the company (or other co-founders) holds a right to buy them back at the original price if the founder leaves before the schedule completes.
Reverse vesting is standard in venture-backed startups. A founder who gets $500,000 in seed funding but hasn't agreed to any reverse vesting schedule may face investor pressure to put one in place before the round closes. It's uncomfortable to negotiate, but investors view it as a basic governance requirement.
Performance vesting: the alternative to time-based schedules
Time-based vesting is the default, but performance vesting ties ownership to hitting specific targets: revenue milestones, product launches, or customer numbers. Performance vesting is more common in senior executive packages than in general employee grants, partly because milestones are harder to define fairly at scale.
Some companies combine both approaches, using a time-based cliff with performance conditions that can accelerate or modify the schedule. This gives flexibility but adds complexity to what should be a straightforward agreement. If a vesting schedule runs to multiple pages of conditions, it may be worth legal review before signing.
What happens to unvested equity when you leave
Unvested equity is forfeited when an employee leaves, unless the agreement says otherwise. Vested equity depends on the structure. With options, leaving employees typically have a window of 30 to 90 days to exercise vested options before they expire. Miss that window and the options are lost regardless of vesting status.
Some companies now offer extended post-termination exercise windows of one to ten years, particularly for long-tenured employees. It's a point worth negotiating at the offer stage, not on the way out the door.
Vesting schedules reward commitment with real ownership. Reading them carefully before signing is the cheapest advice in startup finance.