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Is 4 year vesting really fair?

I hear nowadays that to reward an employee the norm is to give out equity in the form of stock options with a 1 year cliff and 4 years vesting. Is this fair and reasonable?


19 Replies

Jacob Kojfman
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Jacob Kojfman Entrepreneur • Advisor
Experienced technology and corporate lawyer, focusing on SAAS
Yes, very much so. Think about it - you want to give options to people who stick around for just the 1 year, as soon as the cliff period is over, they all leave with all of their options?
Gabriel Moncayo
0
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Gabriel Moncayo Entrepreneur
CEO & Co-founder at AlwaysHired | Top 25 AA-ISP Inside Sales Professional
yes *Gabe Moncayo* [ o ] [removed to protect privacy] [ e ] [removed to protect privacy] [ w ] www.linkedin.com/in/gabemoncayo "Whether you think you can, or you think you can't - you're right."
David Austin
0
0
David Austin Entrepreneur
Entrepreneur
Absolutely.
Mike Moyer
2
1
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Time-based vesting is NOT FAIR.

Yes, everybody does it, yes, it's the "norm," and yes, most people will tell you to do it and yes, it may sound logical.

But...

Vesting is a Band-Aid on a bigger problem: the underlying equity split is never, ever fair. So, vesting is a weak attempt to protect yourself from the inevitable problems caused by a bad underlying split.

It works a little, but by no means is it fair.

With time-based vesting what happens if I get fired the day before I vest? I lose. Or what if I quit the day after? The company loses.

Vesting is just a thing that most people think you should do. It's just part of the conventional wisdom which unfortunately, is flawed.

Traditional equity splits with a time-based vesting schedule is the norm, just like thinking the world was flat was the norm at one time.

Then people realized that the world was round and this opened up a whole new way of looking at things.

The "world is round" approach to equity is the understanding that equity should be dynamic and should be based on what people contribute.

Think of your startup as a casino game. You and your partners contribute time, money, ideas, relationships, etc. Each of these contributions is a "bet" on the future outcome of the game. Winning the game means you generate profits or you sell the company.

The way to divide the equity has nothing to do with how long you thought people were going to play. It has everything to do with the bets placed. Your share should be your bets divided by all bets. If you placed 40% of the bets, you should get 40% of the winnings.

This should be obvious.

Vesting means that you try to figure out how to divide the winnings up before you start playing and that you try to figure out how long its going to take to win and you put vesting in to keep people at the table, even if they want to leave.

That's weird and unfair.

Wait until you win, then count the bets.

This is called the Slicing Pie model and you may have a copy of the Slicing Pie book if you contact me.
Michael Barnathan
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Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
My earlier post was somehow erased, but I'll echo Mike Moyer's point: time based vesting isn't fair, but it is accepted and expected. It isn't fair because the value the company gains from an employee's/founder's skills and services is out of sync with the value the employee or founder gains from the equity.

Also, smart employees know how to divide by four. Can you offer them enough real value to keep them when Google or Facebook come calling?
Chuck Bartok
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Chuck Bartok Entrepreneur
Marketing and Sales Manager at MD Building Systems of Florida, Inc
Interesting how the generations of cupcakes and entitlement employee mindset seem to think they deserve such thing as "benefits".

If one does not like the set up don't accept the Job and find that Utopian Company elsewhere.




Michael Barnathan
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Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
"If one does not like the set up don't accept the Job and find that Utopian Company elsewhere."

Exactly! Highly talented employees have a lot of mobility; they'll move to the place they feel most comfortable.
Steve Savad
3
1
Steve Savad Advisor
CEO, President, Senior VP: Marketing, Bus Dev, Sales
I am a firm believer that everyone should be created and treated equally. If any member of the founding team is given a vesting schedule, then everyone should have the SAME schedule.Offering different schedules to different founders is just wrong. Or, if one founder has no vesting window, then give everyone no vesting window.
Syed Zaeem Hosain
2
0
Syed Zaeem Hosain Entrepreneur
Founder, SVP Engineering and CTO at Aeris Communications, Inc.
This isn't a new thing - it has been around for decades in Silicon valley for example! At the companies I have been at, the approach was:

1. Nothing till the end of the first year. Then immediately vested 25% of the total.

2. Every month after that, vest 1/48th of the total ... so that the total period was 4 years.

Nothing unusual in this, and it is completely fair, as far as I am concerned. The first year is essentially a trial year, till the employee proves themselves as having been a good and correct hire.

Also, in some of the companies I have been at, we received additional grants *later* - not every year, of course, but every 2 to 3 years. If they were *after* the first year of employment, the additional shares began vesting immediately at a 1/48th rate for those shares right from the date of the grant.
Ben Dor
0
0
Ben Dor Entrepreneur
Product Manager at Nest Egg Guru
i wonder why 48 months and not 36? what's so special about 48? (pls don't tell me it's not too short and not too long) when did this number had become the norm?

i think a good approach is a version suggested by Mr. Hosain, along with Mr. Moyer, which is:
delay for a certain time say 12 months (personally would do it shorter) then vest first package based on contribution , then vest 1/24 (personally would do it shorter here too) from a total which is decidedby a evaluation committeebased on contribution , then allocate a new package and vest it also 1/24 based on contribution over previous 24 months and current performance.

this is how i would do it. what do u think?




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