Meaning
Contingent rights to property or equity only become absolute once a specific period has passed or a set goal has been achieved. The existence of unvested claims allows a firm to issue ownership that is earned incrementally over a specified period. This mechanism protects the remaining participants from the equity drain caused by a member who leaves shortly after the launch.
Each claim remains a mere potentiality until the conditions in the grant agreement are satisfied.
Maturation Schedule
Vesting calendars define the timeline for when the ownership rights transform from a contingency into a fixed asset. A common schedule involves a one year cliff followed by monthly increments over several years. This structure ensures that the founders and employees stay with the company to realize their full potential holding.
The schedule is a recorded commitment that cannot be changed without a formal amendment.
Forfeiture Risk
Departing from the organization before the maturation date results in the loss of the unearned portion of the equity. This risk aligns the personal interests of the individuals with the long term stability of the business. The company reclaims the shares for future use without making a cash payment.
Temporal Proof
Founders must maintain records of the start dates and the service requirements for every participant. The data shows exactly how many shares are currently earned and how many remain at risk. This proof is required during any due diligence process.
