"Vesting" is a term that defines how grant recipients will have shares or options made available to them for purchase. For more information on what "vesting" is, check out our blog post here (hint: it has nothing to do with preppy attire). This article will describe the jargon that will be used in defining vesting terms, it will clarify different types of vesting that exist for you to choose from (including how to capture custom vesting), and will cover answers to frequently asked questions (including grant amendments). Please click on the link below to be directed to the portion of the post of interest to you:
There are many types of vesting which can be applied to an option grant or shares. A typical vesting schedule will look like this-- monthly vesting over roughly four years with a one year cliff. If this means nothing to you, here are a few different terms that should help clarify any confusion:
- Total vesting period (this is typically a few years): By the end of the total vesting period, all of the employee’s shares will have been vested.
- Vesting cliff (typically a year): An employee’s shares do not vest until the cliff ends, at which point all of the shares that should have been vested during this time become vested at once. The cliff encourages new employees to stay for more than a year; if they do not stay for more than a year, they walk away with no shares at all.
- Vesting frequency (typically monthly, quarterly, or yearly): This is how frequently your shares vest.
- Acceleration (if any is present, it will usually be single or double trigger): A founder can subject their shares to vesting and also include terms for “accelerated” vesting. If a founder’s shares are subject to acceleration, then, under certain conditions, all or some of the founder's unvested shares will immediately accelerate and become vested (available for purchase) by the founder upon the occurrence of certain triggers.
Types of Vesting
There are many kinds of vesting, the most common being time-based vesting (as described above with the five year example of a typical grant). During the "Grant Shares or Options" workflow, you will always have the option of selecting one of three types of vesting for option or share grants:
- Time-based vesting
- Milestone/Variable vesting
- No vesting
Time-based vesting simply means that a grant is subject to vesting according to a vesting schedule that relies on time (hence the name). Essentially, this means that whatever schedule you decide to set up (cliff, no cliff, monthly, quarterly, you name it!) the grant relies on time to determine how many shares have vested at a particular moment. The system will perform these calculations for you based on your input during the "Grant Shares" flow - saving you time (and potentially headaches) from working through this math for all of your employees!
Milestone/Variable vesting (also known as custom-based) is a form of vesting that does not rely solely on time. For example, it could be a vesting clause that asserts that Dinesh receives an increase of 20% vesting every 12 months. While the system has the capability of vesting shares to employees based on performance indicators rather than a period of time, it is a two-step process. To record custom-based vesting, you will want:
- Run the "Grant Shares" workflow and select "Milestone/Variable Vesting" (from the drop-down menu next to "Vesting Type"). Next add relevant text regarding the conditions that must be met for the individual's/entity's shares to vest. The second phase in this process is to record when a milestone has been achieved.
- Because the system does not know when these milestones have been met, you will want to run the "Capture Custom Vesting Event" workflow to capture the vesting of shares. You can even save these custom milestone events and easily use them again.
Frequently Asked Questions
How Do I Pause Or Freeze Vesting?
It is unusual to pause or freeze vesting and we recommend speaking to your lawyer before you pause or freeze vesting. If you need documentation to memorialize this arrangement, you should contact your lawyer to draw up these documents. If you and your lawyer decide freezing or pausing your vesting is necessary, please reach out to email@example.com for more information on how to properly reflect this vesting in your cap table.
How Do I Make Changes To A Grant's Vesting Schedule?
If you'd like to record a change in a grant's vesting schedule, perhaps to change the grant from milestone-based vesting to time-based vesting, you'll want to run the "Amend Grant Or Add Vesting" workflow. This workflow will allow you to upload evidence of the change (your lawyer will want to draft something for you to upload as the system will not generate this documentation). During the flow, you will be able to edit the following details:
- Type of vesting
- Number of shares granted
- Per share price (if applicable, read more about this optionality here)
- Expiration date
- Vesting commencement date
- Number of shares subject to vesting
You will be asked to upload Board Approval for these changes.
Fidelity does not provide legal or tax advice.
Screenshots are for illustrative purposes only.
© 2023 FMR LLC. All rights reserved.