Vesting schedules and cliffs are key tools to align incentives, protect your equity, and reduce potential conflicts with co-founders. Here's everything you need to know.

1. What is a Vesting Schedule?
A vesting schedule dictates how and when a co-founder earns their equity over time. This ensures that each founder stays committed to the company long enough to "earn" their shares, protecting the team if someone leaves early.
Purpose: Prevents someone from leaving early and retaining a large portion of equity, which could unbalance ownership and disrupt future investor relations.
Structure: Typically, vesting occurs on a monthly basis, with equity being allocated over a set period (often four years).

Example: With a four-year vesting schedule, a co-founder would earn 1/48th of their equity each month until they are fully vested after four years.

2. What is a Cliff?
A cliff is a set period at the beginning of the vesting schedule during which no equity is vested. If a co-founder leaves before the cliff period ends, they don’t receive any equity.
Purpose: Acts as a "trial period" to ensure commitment. If a co-founder leaves or isn’t contributing as expected, they depart without ownership, preventing equity dilution.
Typical Length: Commonly set at one year.

Example: With a one-year cliff on a four-year vesting schedule, no equity vests during the first year. After 12 months, the co-founder "earns" their first year of equity (25%), and then monthly vesting begins.

3. How Vesting & Cliffs Avoid Co-founder Issues

• Equity Protection: Prevents founders from keeping equity without contributing long-term value.
• Incentive Alignment: Keeps everyone motivated to stay and contribute over time.
• Transparency: Clear vesting terms prevent misunderstandings about who owns what.
• Exit Protection: If a founder departs early, the unvested shares can be re-allocated to hire key talent or attract investors.

4. Common Vesting Structures

1. Standard Four-Year Vesting with a One-Year Cliff

Why it Works: Aligns with common investor expectations. Ensures founders earn equity gradually and gives the company time to assess fit during the first year.

1. Three-Year Vesting with a Six-Month Cliff

Why it Works: Shorter for founders aiming for faster exits. Ideal for companies expecting rapid scaling or early acquisition.

1. Milestone-Based Vesting

Why it Works: Useful when equity is tied to specific goals. Not time-bound, but goal-bound (e.g., reaching a revenue target or building a product MVP).

Tip: For startups planning to raise capital, stick to the four-year vesting with a one-year cliff as it aligns with investor preferences.

5. Key Terms to Know

• Fully Vested: When a founder has "earned" 100% of their allocated equity.
• Reverse Vesting: A structure where shares are issued upfront but are subject to vesting terms. If a founder leaves, unvested shares are returned.
• Accelerated Vesting: Triggers all or part of unvested shares to vest faster in specific situations, like acquisition. Be cautious—accelerated vesting can deter investors if overused.

6. Setting Up a Vesting Agreement

1. Agree on Equity Split and Vesting Schedule: Have an honest discussion with co-founders to set a fair split. Balance individual contributions, roles, and commitment.
2. Define the Vesting Terms in Writing: Outline vesting duration, cliff period, and vesting frequency. If your agreement includes accelerators, specify the terms.
3. Establish Exit Terms: Define what happens to equity if a founder leaves, especially for cause, without cause, or in cases of company sale.
4. Seek Legal Advice: Vesting terms can be complex. Work with a startup lawyer to ensure the agreement is enforceable and aligns with local regulations.

7. Best Practices for Founders

• Discuss Vesting Early: Equity discussions can be sensitive, but setting vesting terms upfront prevents future conflicts.
• Regular Check-ins: Conduct quarterly or annual reviews to ensure everyone’s meeting expectations.
• Avoid Accelerated Vesting Clauses: They can be tempting but often deter investors who want everyone committed for the long term.
• Reallocate Unvested Shares: If a founder departs, consider redistributing unvested shares to attract future talent or investors.

8. FAQs on Vesting & Cliffs
Q: What if a co-founder wants to leave before they’re fully vested?
A: If they depart early, they retain only the vested portion. Unvested shares stay with the company, available for redistribution or retention.
Q: Can we change the vesting schedule after it’s set?
A: Vesting changes require unanimous consent and usually aren’t advisable after your company has investors.
Q: Do advisors or early employees also need vesting schedules?
A: Yes, but often on shorter schedules. Advisors may have two-year vesting, for example, to reflect their role’s scope and time commitment.
Q: Should I offer a cliff to early employees?
A: Yes, cliffs provide a trial period to ensure commitment and are a standard feature for both founders and early employees.

9. Sample Vesting Schedule Agreement
Here’s a simplified example of vesting language for a founder agreement:
Equity Grant: 25% ownership in [Company Name]
Vesting Period: Four years with a one-year cliff
Vesting Start Date: [Date]
Vesting Frequency: Monthly after cliff completion
Cliff Period: One year
Early Departure Terms: Unvested shares will be returned to the company upon departure