Silicon Valley Legal Bible（6）Vesting Schedule (Maturity/Vesting Period) is not necessarily an Option
The Silicon Valley Legal Bible with Forty-Two Chapters, a legal encyclopedia customized for founders. I am Liu Xiaoxiao, a U.S. attorney.
I. Vesting Schedule (Maturity/Vesting Period) is Everywhere
When it comes to Vesting Schedule (maturity/vesting period), many people will have a misunderstanding that as long as there is this word, said the employee options, but in fact, there are many mechanisms will be used Vesting Schedule (maturity/vesting period). For example, the typical 401(k) (Retirement Plan) and Pension Plans (Pension Plans) will also have a Vesting Schedule, where the employee does not enjoy all the benefits as soon as he/she starts working, but gradually gets more and more as he/she works for more and more years.
There are also, for example, family trusts in the United States, parents will set up different levels of Vesting Schedule (maturity/vesting period), for example, the child will get a fortune when he/she becomes an adult at the age of 18, and then at the age of 25, and then at the age of 35, he/she will get a fortune again.
Therefore, it should be said that the Vesting Schedule (maturity/vesting period) is a kind of measurement of time scale, this is because the benefits can not be given to you all at once, but should be sent out in batches, so as to play an incentive role.
II.Vesting Schedule (maturity/vesting period) of different types
Speaking of Vesting Schedule (maturity/vesting period) of the second misunderstanding, is that many people will think that Vesting Schedule (maturity/vesting period) must be how much maturity each year. However, you can actually design the exact pace of your Vesting Schedule. Two common categories are Time-Based and Milestone Based.
1. Time-Based
Time-Based is easy to understand, like the four-year maturity period we often hear about. But in fact, time-based is also a lot of flexible adjustment, there are three common, average, cliff and irregular.
1.1 Average
This one is the easiest for everyone to understand, averaging four years at 25% per year
1.2 Cliff
This is what we often hear people say Cliff (cliff), also known as 4 years with 1 year-cliff inside the Cliff (cliff) from. What does it mean? This model is to divide the incentive into 48 equal parts, then 4 years should be 1/48 of the maturity of each month, but not directly so that the average maturity, but the first year of all 12 1/48 (that is, 12 * z1/48 = 1/4) are uniformly placed at the end of the twelfth month to mature together.
Those of you who are new to this approach are wondering how this is different from averaging 1/48 per month. Or how is this different from 25% per year? The difference is actually that this way with Cliff (cliff) requires employees to work for at least one year before they have the opportunity to get the first incentive, to avoid some people do a month on the run. We all know that employees have just started working the first few months is the most likely to have staff turnover, if you have been working for a full year of employees, usually less likely to suddenly flash, and the calculation is really flash, then people also stayed in the company for a year, there is no credit also have hard work. Better than those out of a bunch of dry a month on the road to run the hands of the employees with the company a throwback to the welfare of a period of time but also run to find you to cash, but also not enough process procedures on the trouble.
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1.3 Irregular
The third one is of course the irregular style without any rules. In fact, Vesting Schedule (maturity/vesting period) no one stipulates that it must be 4 years, in real life, 2 years, 3 years, 4 years, 6 years, 8 years we have encountered, and no one stipulates that it must be 2 years, then it is 50% per year, four years is 25% per year, or in other words, Vesting Schedule (maturity/vesting period) is Vesting Schedule (maturity/vesting period) is a time scale that can be arbitrarily arranged, which will also be reflected in the examples we will give next.
2. Milestone Based
First of all, this Milestone (Milestone) is an English translation of the problem, in fact, more relevant is what we say in Chinese to reach the standard, to achieve a standard on how much maturity Milestone Based (Milestone Based) in fact, is not a measure of time, but to complete a task to mature how much, for example, we set up four tasks stage, each completed a task will mature 25%. For example, if we set up 4 task stages, every time we complete a task, we will be 25% more mature.
However, it should be noted that Milestone Based can only be used for those milestones that are clearer and easier to measure, such as a product development to achieve what function as a stage of the standard. But for example, if a company employs a Board Advisor, the general role of the Board Advisor is to let the Board Advisor come up with ideas and solutions for problems that the founders don't know how to deal with in the course of the company's development, then it's hard to say what milestones should be achieved to be measured, and so this kind of milestones is more appropriate. The previous kind of Time-Based (time-based)
3. Hybrid (hybrid)
The following hybrid is easier to understand, that is, Time-Based and Milestone Based together, such as not only the Vesting Schedule (maturity/vesting period) divided into four years, but also each year to complete a milestone. If you don't meet the milestone in one year, then the year is wasted and you have to wait for the next year to achieve it.
Or the first two years are measured in time, and the later part of the program is predicated on the completion of a certain goal before the new part can mature.
III. Cases of famous companies
1. Amazon's Restricted Stock Unit (RSU)
Amazon's RSU, or Restricted Stock Unit, is notoriously stingy. This shows you the description of Amazon's RSUs.
Year 1: 5% of the initial grant will vest at the end of your first year as an Amazon employee.
Year 2: 15% of the grant will vest at the end of your second year.
Year 3: 20% of the grant will vest at the six-month point of your third year. The grant will vest again at the same rate at the 12-month mark, for a total of 40%.
Year 4: The grant will be identical to the plan for the third year.
Year 1: 5% of your initial stake will be unlocked when you've been an Amazon employee for one year.
Year 2: 15% will be unlocked during your second year.
Year 3: 20% of your equity will be unlocked at the end of your third year and a half. At the end of the third year, another 20% will be unlocked, making a total of 40% unlocked in the third year.
Year 4: The unlocking of equity in year 4 will be the same as in year 3 of the program.
What does this mean? In short, 5+15+40+40, so the first two years of working at Amazon only add up to 20%, whereas a year of working at another company gives you 25%, so it's no wonder Amazon is known as a sweatshop.
2. Pacific Gas and Electric Company (Pacific Gas and Electric Company) Pension Plan (Pension Plan)
In fact, we have often heard of PG&E, this company in the Pension Plan (Pension Plan) to provide employees with the provisions:
You'll be 100% vested in the value of your cash balance account after 3 years of service or at age 55.
You'll be 100% vested in the value of your cash balance account after 3 years of service or at age 55.
That means their Vesting Schedule is 100% vest after 3 years.
3. 401(k) Retirement Accounts from Major Tech Giants
As just said Vesting Schedule (maturity / vesting period) also tends to appear in the operation of the employee's 401 (k) retirement account, the following we listed a few large companies in the 401 (k) retirement account Vesting Schedule (maturity / vesting period) of the application.
For example, Google (Google) Vesting Schedule (maturity / vesting period) is directly all mature. In contrast, Amazon takes 3 years to mature. There is also Oracle (Oracle) is divided into 4 years, 25% per year, is the way we most often hear.
Today we have learned about the Vesting Schedule (maturity/vesting period) system through various dimensions, and you should find this system very flexible and practical. It is because of such a reasonable time setting, but led to a series of love and hate chain reaction, including we often heard of 83(b) and single trigger/double trigger, the next few issues we will introduce these concepts to you one after another.
The Silicon Valley Legal Bible with Forty-Two Chapters, a legal encyclopedia customized for founders. I'm Xiaoxiao Liu, a U.S. attorney.
