vesting should be 7 years, not 4 years

Almost every technology start-up (including Rapleaf) gives stock options the same way … they often use the same docs that were developed many years ago at Wilson Sonsini. They vest over four years (usually monthly but sometimes quarterly) and have a one year cliff.

My question: why four years? Why not 5 or 6 or 7 or 9?

Nowadays, the average time from Series A round to exit is over eight years. So how does the 4 year vesting reflect the company? It seems like a better strategy would be to give your employees more options and have them vest over a long period of time (like seven years). That way they are incented to stay longer. Of course, many start-ups remedy this by giving their star performers additional stock grants along the way … but for some people in the company, most notably the executives, the additional grants are not even close to the initial grant.

I think the reason that most companies offer four-year vesting is that most companies offer four-year vesting. They want to stay competitive in the market for talent so they do not experiment or deviate fro the norm. that is certainly the reason why Rapleaf did not deviate from tradition.

But some tech companies, especially those outside of Silicon Valley, have successfully experimented with vesting timelines. I believe Microsoft had a seven year vesting until recently. That seems like a timeline more in line with the good of the company in mind. (Of course, I’m not personally looking to be a pioneer in this area so we are gonna stick with 4 years until enough companies make the move to show the rest of us the way).

1 thought on “vesting should be 7 years, not 4 years

  1. regularguy

    I think from an employee’s perspective, there is a much higher opportunity cost for staying in a company for a long time (e.g. 8 years) and not seeing any returns.
    I would say that if the vesting period is 7 or 8 years, the amount of stock options given to employees should be much higher. Higher risk, higher option grants.

    Reply

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