How to eliminate unwanted cliffs with front-loaded vesting
A simple program design change that benefits the employee and the company.
A standard approach to new hire equity for public tech companies is a new hire grant ~2x the refresh grant, followed by annual refreshes, all with 4-year standard vest.
Assume a $60k refresh grant and it looks like this:
The problem with this approach is the big drop off in vesting in Year 5, from $75k to $60k, a 20% drop — in effect, you’re signaling to employees that’s the time to leave.
How can we avoid this cliff?
Let’s design a solution that meets the following constraints:
No drop-off in the value vesting each year
The employee cumulatively vests the same or more: $270k
The company cumulatively grants the same value or less: $470k
The unvested value is at (or exceeds) the new hire grant to de-risk attrition
A better program design
A simple way to accomplish this goal is with the combination of a front-loaded new hire grant and ratable refreshes:
The key drivers to make this program work are:
Front-loading the NH grant — this helps eliminate the cliff in year 5
Reducing the NH grant multiple — this also reduces the cliff, and lowers total spend
Moving to 3-year vests — this pulls more vesting value forward
Notice we’ve actually saved the company money, spending $390k vs $420k in cumulative value granted, savings of 7%.
How does the new program score according to our rules:
Any Y/Y $ decrease in employee vests? No ✅
Does the employee get $270k vested or more? Yes ✅
Does the company grant $420k of stock or less? Yes, $390k ✅
Does unvested value in each year exceed the new hire grant? Yes ✅
The employee perspective
When we lower our new hire multiple from 2.0x to 1.5x, should we be worried it’s less attractive to the candidate?
I think no, for a very specific reason: people rationally discount future value.
Let’s be honest, four years is an eternity, especially in tech.
The original 4-year ratable grant is $120k total, but vests only $30k in the 1st year.
Our new 3-year front-loaded grant is only $90k total, but vests $45k in the 1st year.
That’s 50% better.
Look at the cumulative vesting curves:
The employee gets the same amount total, but the new vesting schedule gets them more value sooner.
Is there a catch?
Yes — if the company’s stock price performs well, the new vesting schedule produces less upside long-term. (Which is partly why a standard 4-year vest fits startups so well.)
But the new vesting schedule still provides above-market unvested value each year that can compound, while the employee vests more stock sooner (which, by the way, they don’t have to sell).
And the company grants fewer shares.
Everyone wins.
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