The essential guide to establishing a vesting schedule

Vesting or a vesting schedule is a standard part of employee share option plans (ESOP) and requires an employee to meet certain milestones to earn their allocated share options in the company that they work for. In addition to being a way for employees to diversify their investment portfolio and build long-term wealth, vesting also allows companies to attract, retain and incentivise loyal top-performing talent.

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What is a vesting schedule?

Employee share scheme ownership is usually earned over time once specific milestones are met, such as individual performance milestones, company milestones, or a period of employment is reached. This is known as a ‘vesting schedule’. Vesting schedules are designed to retain talent long-term. Vesting schedule terms can vary by company role, level of seniority and individual employee agreements. 

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Having an employee share scheme with an employee-friendly vesting schedule is a significant advantage for companies when attracting and recruiting key talent. It can help start-ups stay market competitive against more established companies who may be able to offer a more generous salary.

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What is an example of a vesting schedule?

When designing a vesting schedule, it's important to determine what time-based vesting requirements and conditions or milestones will be attached to the schedule. A common vesting period is between three and five years; however, this can differ depending on your company's requirements and individual employee contracts. 

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When you design your company’s vesting schedule, it’s important to consider how the schedule can incentivise employment longevity. This could look like:

• A cliff vesting schedule: This is when an employee earns no equity if they leave the company within a set time period, such as the first year. This helps incentivise long-term employee loyalty. The standard vesting cliff period is one year. 
• General vesting schedule: This is when an employee earns an equal percentage of shares each year within a set period of time, such as three or four years. This schedule may also include an initial one-year cliff. 
• Immediate vesting schedule: This occurs when an employee who has been with a company before the employee share scheme was established is immediately rewarded for their considerable company contribution.  
• A back-weighted vesting schedule: This could include 10% equity earned in the first year, 20% equity in the second year, 30% in the third year and 40% in the fourth year of employment.

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What companies use vesting schedules?

Vesting schedules are an especially popular mechanism amongst start-ups as a means to attract and retain talent during the early years of a business. However, vesting schedules are also commonly used by large global tech companies. Some examples of tech companies that have an employee share scheme vesting schedule are: 

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Google (Alphabet Inc.), Microsoft, Apple and Meta 

These tech giants' typically follow a four-year vesting schedule with a one-year cliff, meaning that employees receive no equity if they leave within the first year. Once the first-year milestone has been reached, employees start to vest ownership monthly or quarterly. 

Amazon

In contrast, Amazon’s vesting schedule is typically weighted towards the later years of employment. This means that a four-year vesting schedule with a one-year cliff is weighted, so a large portion of the equity is earned in years three and four. 

Netflix

Streaming giant Netflix has a unique vesting schedule that allows employees to vest from the beginning of their employment. They typically offer stock options that vest on a four-year vesting schedule.

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How can you customise and create flexibility with a vesting schedule?

We recommend that companies consult with their financial advisors and board before finalising an employee share vesting schedule to ensure that the schedule best suits their business goals. Vesting schedules are flexible and can be customised to suit your business needs and different employees. An example of this could be creating a shorter vesting schedule of three to four years for key talent at an intermediate level, while executives have an extended cliff vesting period to incentivise them to stay longer at the company. 

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We also recommend including a clause in an employee vesting schedule, which includes details on what will happen if an employee’s contract is terminated before their vesting schedule is met or the company is acquired.

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Interested in setting up a vesting schedule for your business’ employee share scheme? Our experienced team has helped a range of businesses in Australia and New Zealand create employee share vesting schedules that suit their needs.

‍Contact the Orchestra team today to learn more.

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