Vesting: what it means for your share option scheme

Last updated: 27 June 2024. 

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, benefits and maybe even a bonus, but what about making shares a part of your compensation package?

An employee share option 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. 

Here, we’ll cover:

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

What is vesting, exactly?

Give an employee ordinary shares, and they'll become a shareholder right away, which is why many companies choose to award share options instead because they vest.

Vesting is the process where employees gradually earn the right to keep their equity rewards.

Vesting = earning ownership of an asset over time.

Employees have the right to turn their options into real shares in the future at a pre-approved price. But only once their options have fully vested -  in other words - they've completed the vesting schedule.

Vesting schedules

It's unusual to not have options vest, especially if employee retention is the aim of the game.

That's why a typical time-based vesting schedule is between three and five 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’. 

75% of Vestd customers choose time-based vesting for their schemes.

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 there's an exit - ie. the business is sold or there's a significant organisational change. Though you can add performance-based milestones too.

Why a vesting schedule is 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.

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.

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. 

Design a vesting schedule with ease

On Vestd you can design a vesting schedule, outline all of the desired milestones and manage your company’s share scheme all in one place.

Talk to our team and ask for a sneak peek of our guided scheme designer.

Ask an expert