How do you negotiate the vesting and the employee stock option plan?

1 What is vesting and why is it important?

Vesting is the process by which you earn the right to own your shares or options over time. It is usually based on a schedule that specifies how long you have to work for the company or achieve certain milestones before you can fully own your equity. Vesting is important because it aligns your interests with the company's long-term success and reduces the risk of losing your equity if you leave or get fired. It also protects the company and the investors from dilution by preventing you from selling your shares or options too early or to the wrong parties.

2 How to negotiate the vesting schedule and cliff?

The vesting schedule determines how fast you can own your shares or options, and the vesting cliff is the minimum period of time you have to work for the company before you can own any equity. The typical vesting schedule is four years, with a one-year cliff, meaning that you have to work for the company for at least one year before you can own 25% of your equity, and then you vest the remaining 75% monthly or quarterly over the next three years. However, you can negotiate the vesting schedule and cliff based on your role, experience, contribution, and market value. For example, you can ask for a shorter vesting period, a longer cliff, a backdated start date, or an acceleration clause that allows you to vest faster if certain events occur, such as an acquisition or a change of control.

3 What is an ESOP and how does it work?

An ESOP is a pool of shares or options that the company reserves for its employees as part of their compensation. It is usually created by the founders and the investors during the fundraising process, and it is allocated to the employees based on their roles, performance, and seniority. An ESOP is a way for the company to attract, retain, and motivate its talent by giving them a stake in the company's future growth and value. However, an ESOP also dilutes the existing shareholders, including the founders and the investors, so it has to be carefully designed and managed.

4 How to negotiate the ESOP size and terms?

The ESOP size and terms depend on the stage, valuation, and goals of the company, as well as the expectations and preferences of the founders, the investors, and the employees. The typical ESOP size ranges from 10% to 20% of the total shares outstanding, but it can vary depending on the industry, market, and competition. The ESOP terms include the exercise price, the expiration date, the tax implications, and the transferability of the options. You can negotiate the ESOP size and terms by doing your research, benchmarking with similar companies, and understanding the trade-offs between equity and cash. You can also leverage your skills, network, and reputation to demand a higher or lower ESOP allocation.

5 What to look out for in the term sheets and agreements?

The term sheets and agreements are the documents that formalize the vesting and the ESOP terms between the parties involved. They usually include the following sections: the capitalization table, the vesting schedule and cliff, the ESOP size and terms, the option grant agreement, the stock purchase agreement, the shareholders agreement, and the stock option plan. You should read and understand these documents carefully, and consult with a lawyer, an accountant, or a mentor if you have any questions or concerns. You should also look out for any clauses that can affect your vesting and ESOP rights, such as the drag-along, the tag-along, the anti-dilution, the liquidation preference, and the co-sale rights.

6 How to manage your vesting and ESOP over time?

Once you have negotiated and signed the vesting and the ESOP terms, you should keep track of your equity ownership and value over time. You should also update your vesting and ESOP information whenever there are any changes in the company's capital structure, such as a new funding round, a stock split, or a merger. You should also consider your vesting and ESOP options when you are planning to leave or join a company, or when you are facing a liquidity event, such as an IPO or an acquisition. You should weigh the pros and cons of exercising, selling, or holding your shares or options, and consult with a financial advisor or a tax professional if needed.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?