Vesting is a way to make people earn their equity over time. Instead of giving 100% of an equity grant up front, vesting allows you to award it over time. With a four-year vest, which is the usual amount of time to vest, equity would not be awarded in full until after four years have passed.
You can choose to award the prorated equity in monthly or yearly installments (known as “cliffs”). After 18 months, a four-year vest of 10% with a monthly cliff results in 3.75% equity earned (18 months passed /48 month vest * 10% equity grant). With an annual cliff, the same 18 month time period results in only 2.5% earned, since the second year hasn’t yet been reached (1/4 * 10%).
The benefit of vesting is that it creates a strong incentive for your employees and partners to stick around. It also protects you if they decide to leave early, since they get to keep only the equity that they’ve earned. Everyone in the company with equity should be subject to a vest, especially cofounders. Without a vest, your 50% partner can leave after a few months and keep all 50%.
