Vesting
Gradual earning of equity over time, often with cliff and reverse vesting provisions.
Definition
Vesting is the gradual earning of equity over time, often with a 1-year cliff and 4-year linear schedule. Reverse vesting: founder equity is subject to forfeiture if founder leaves before vesting completes.
Context
Critical for multi-founder LLCs and any LLC with employees/contractors receiving equity.
Example
Two co-founders subject themselves to 4-year vesting with 1-year cliff. If one leaves at month 18, they keep 18/48 of their equity stake; remainder reverts to LLC or other founder.
Common pitfalls
- Vesting provisions need explicit Operating Agreement clauses.
- Tax implications (83(b) election) for vesting equity.