When shares are subject to “vesting” it means that they are subject to forfeiture or repurchase by the issuing corporation accordance to terms and conditions that the corporation establishes in its discretion. Upon vesting, the recipient benefits by assuming full ownership of the shares. Upon termination of employment, the unvested shares will either be forfeited back to the corporation, or the corporation may have a right to repurchase any unvested shares at a price determined by the company (usually the original price paid by the recipient for such shares). Recipients holding stock subject to vesting usually may exercise full voting rights with respect to the shares.
In general, there is an expectation among angel and venture investors that the founders of start-up companies will subject their shares to vesting so the founders forfeit shares if they leave the company prior to vesting. In other words, the founders’ shares will be earned over time as they provide services to the company. This keeps the founders incentivized to stay with the company and contribute to its success.
The standard vesting schedule is for 25% of the granted shares to vest on the first anniversary of the date of grant for so long as the stockholder remains in continuous service with the company as an employee or consultant. The remaining shares then vest at a rate of 1/48th of the total shares monthly thereafter, again so long as there is continuous service. This is commonly called a “4-year vest with a 1-year cliff.” In some cases, investors may allow the founders to establish a vesting commencement date based on when the founder began providing significant services to the company so that he or she can get credit for time already served.