The hiring process in startups is challenging. Founders must place their entire trust in an employee to ensure that growth isn’t delayed. Especially with many officials involved, startups have needed to provide ownership to the right person. And that’s why they choose to grant equity as part of the compensation package. This can also be considered as partial ownership of the company.
In this blog, we will cover everything about the vesting period, how it works, and how startups can benefit from it.
The vesting period is the minimum waiting period for an employee to gain full ownership of benefits like equity. This helps retain top-performing employees in a startup. The employee gets non-forfeitable ownership rights to the assets.
In addition to these, Vesting guarantees 4 important benefits for startups.
• Aligns founders’ and employees’ interests with the company’s long-term goals.
• Protects the startup by claiming unvested shares if someone leaves early.
• Reassures investors that key contributors are committed to staying.
• Promotes team stability and discourages early departures during critical growth phases.
There are two types of vesting, basically.
• Cliff Vesting
• Graded Vesting
Cliff Vesting is a type of vesting where the employee does not get any benefits from the startup, like equity, until they complete a specific waiting period. This waiting period is also known as the cliff. After the cliff period, the employee receives significant ownership benefits, such as incremental vesting.
Example:
During a 3 -year cliff period, the employee gets 0% vested in employer contributions for the first 2 years. At the end of Year 3, the employee receives full benefits with 100% ownership of all employer contributions.
Graded vesting is a process where employees gradually get to earn full ownership of the startup’s benefits after several years of work. It’s different from cliff vesting because, here, employees receive a percentage each year. It can be called incremental ownership since employees gain ownership each year after they work.
Example:
With a 4-year graded schedule, you might get
• 25% vested after year 1
• 50% after year 2
• 75% after year 3, and
• 100% after year 4.
|
Feature |
Cliff Vesting |
Graded Vesting |
|
Vesting Schedule |
100% at a specific date |
Partial vesting over several years |
|
Example |
100% after 3 years |
20% per year over 5 years |
|
Employee Ownership |
All or nothing until the “cliff” date |
Increases gradually each year |
Also read: Burn Rate Explained for First-Time Founders: Guide to Extend Runway
According to sources, the industry standard for startup equity compensation in 2026 is a four-year vesting period with a one-year cliff.
The most typical vesting setup for startups involves time-based vesting to ensure long-term commitment.
• Vesting Period: Four years (48 months).
• Cliff Period: A one-year initial waiting period during which no equity vests.
• Vesting Increments: After the one-year cliff, 25% of the total grant vests immediately. The remaining 75% typically vests monthly or quarterly over the next three years.
Grant is a non-cash allocation of company ownership given to employers or founders to align their interests with the company's long-term success.
Here is a typical example of a 4-year vesting schedule with a 1-year cliff for a grant of 48,000 shares:
• Months 0-12 (Cliff Period): 0 shares vested. If the individual leaves during this period, they forfeit all shares.
• Month 12 (One-Year Anniversary): 12,000 shares (25%) vest all at once.
• Months 13-48: The remaining 36,000 shares vest monthly at a rate of 1/36th of the remaining total per month (or 1/48th of the original grant per month).
• Month 48 (Four-Year Anniversary): 100% of the shares are fully vested.
Vesting and equity can affect your taxes. For example, if you get stock options, you might be able to make an “83(b) election,” which can change when and how much tax you pay. These rules can be tricky. It is a good idea to talk to a legal or tax expert like Tarsus before you prepare any equity or vesting agreement. Getting advice early can help you avoid surprises. Also, it makes sure your plan works for everyone.
Vesting periods are a foundational part of startup compensation. Equity is frequently used to retain top talent. By granting equity with a vesting schedule, startups motivate founders to contribute to the company’s long-term growth. The vesting period acts as a safeguard.
Only those who remain committed over time gain full ownership of their shares or options. This approach not only protects the company but also aligns everyone’s interests. Also, it helps build a stable, dedicated team. As you design your startup’s equity plan, work closely with legal and equity advisors to ensure your vesting schedules support both your business goals and your team’s success.
Read our latest case study here: Tarsus Unifies Finance for Multi-Entity PE Firm