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Vesting: what it means for your company share scheme

Vesting: what it means for your company share scheme

There are many ways to increase employee engagement and look to reward your employees for their hard work.

For sure, you should think about salary, a benefits package and maybe even a bonus, but what about making shares a part of your employee incentive scheme?

An employee share scheme is a cost-effective incentive that can unlock a whole lot of potential.

However, before you choose to go down that route, you should think carefully about a vesting schedule for your company share scheme. 

In this article, we’ll cover:

  • What a vesting schedule is
  • What a typical vesting schedule looks like
  • And how it’s an integral part of an employee share options scheme.

What is vesting, exactly?

A vesting schedule determines when and how an employee can earn their shares or options. So rather than be available immediately, with vesting, their options will gain their full value over time. 

With shares, the recipient becomes a shareholder right away, but options are the promise of owning shares in the future. Learn about the difference between shares and options.

Vesting schedules usually underpin employee option schemes such as Enterprise Management Incentive schemes (EMIs). Learn more about vesting schedules for EMI schemes.

And once an employee has fulfilled the terms of their agreement (more on that in a moment) they can then exercise their options - that is convert their options into real shares.

A typical vesting period is between 3-5 years, although this varies from business to business. You might see this expressed as something like ‘a four-year vesting schedule with a one-year cliff’. 

The aim is to make employees feel that they’re a key part of the company and, by doing that, they are far more likely to stay where they are and see it through, rather than move jobs (potentially for a competitor). 

When and how their options vest depends on whether their options are:

  • Exercise-based 
  • Exit-based

Exercise-based options ask for the completion of particular milestones related to performance. Once these milestones have been met as part of the vesting schedule, their shares are vested and they start to reap rewards.

Whereas exit-based options vest once the business has been sold or once there is a change of management/structure. Though you can add performance-based milestones too.

Download our free milestones guide to see what kind of conditions you could set for your employee share scheme.

Why is a vesting schedule a good idea?

Employees with a slice of the pie are actively engaged in the business, its success and their individual and collective role in that.

More startups are starting to understand the extreme importance of this in terms of employee retention and business success overall. In effect, employees own a small part of the business, once their shares have vested. 

By adding performance milestones into the vesting schedule, employees are more likely to perform and ‘go the extra mile’. This is obviously beneficial in terms of productivity and a business's bottom line.

And employees look forward to the vesting of their shares too...

If the business is a success, the likelihood is that the value of their shares will increase over time, which means when/if they come to sell their shares that could equate to a life-changing financial gain. And that’s in addition to their salary and pension.

Now, there are likely to be other shareholders such as directors and investors that get more of a say in key strategic decisions. But offering equity to employees in this way gives a small amount of ownership which could make all the difference to the success of the business.

Calculate how much equity to give to your team with our handy tool.

Key takeaways

Employee share schemes are a key factor in a business's success but they can also transform an employee’s perspective of their vital contribution and the company.

And it’s that engagement and motivation that can move mountains.

Employee retention is something that managers need to focus on intensely. Without this, they run the risk of losing experienced and skilled employees to their competitors. And for startups, this is even more vital

Once you find the right people for the job, show them that you value them and hold onto them as long as you can - choosing the right vesting schedule for your company share scheme will help you do that. 

Read our top tips for how to keep employees engaged with your company share scheme.

Design a vesting schedule with ease

Vestd is the only equity management platform with an intuitive share scheme designer. You can set a vesting schedule, outline all of the desired milestones and manage your company’s share scheme all in one place.

Join Vestd today and start designing a vesting schedule for your employee option scheme.

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