Editing Vesting (section)

===Ownership in startup companies===
Small entrepreneurial companies (''[[startup]]s'') usually offer grants of [[common stock]] or positions in an [[employee stock option]] plan to employees and other key participants such as [[independent contractor|contractors]], [[board of directors|board members]], [[Advisory board|advisors]] and major vendors. To make the reward commensurate with the extent of contribution, encourage loyalty, and avoid spreading ownership widely among former participants, these grants are usually subject to vesting arrangements.

Vesting of options is straightforward. The grantee receives an option to purchase a block of common stock, typically on commencement of employment, which vests over time. The option may be exercised at any time but only with respect to the vested portion. The entire option is lost if not exercised within a short period after the end of the employer relationship. The vesting operates simply by changing the status of the option over time from fully unexercisable to fully exercisable according to the vesting schedule.

Common stock grants are similar in function but the mechanism is different.  An employee, typically a company founder, purchases stock in the company at nominal price shortly after the company is formed. The company retains a [[Repurchase agreement|repurchase]] right to buy the stock back at the same price should the employee leave. The repurchase right diminishes over time so that the company eventually has no right to repurchase the stock (in other words, the stock becomes fully vested).

Beginning in the 1990s, vesting periods in the United States are usually 3–5 years for employees, but shorter for board members and others whose expected tenure at a company is shorter. The vesting schedule is most often a [[pro-rata]] monthly vesting over the period with a six or twelve month cliff. Alternative vesting models are becoming more popular including milestone-based vesting and dynamic equity vesting.<ref>{{Cite news|url=http://slicingpie.com/bootstrapper-equity-why-time-based-vesting-is-a-waste-of-time/|title=Perfect Equity Splits for Bootstrapped Startups|work=Slicing Pie|access-date=2017-09-29|language=en-US}}</ref>

In the case of both stock and options, large initial grants that vest over time are more common than periodic smaller grants because they are easier to account for and administer, they establish the arrangement up-front and are thus more predictable, and (subject to some complexities and limitations) the value of the grants and holding period requirements for tax purposes are set upon the initial grant date, giving a considerable tax advantage to the employee.