How Startup Vesting Actually Works

Ask most people what “vesting” means and they’ll describe a deal: you stay, your equity accumulates, and once a chunk of it vests, it’s yours no matter what happens next. That’s true almost everywhere — which is what made one 2011 startup’s fine print a genuine scandal instead of a routine departure.

The clause that made “vested” shares worthless

In March 2010, Yee Lee joined Skype as an employee, a little under a year after Silver Lake Partners led an investor group — alongside Andreessen Horowitz and the Canada Pension Plan Investment Board — that bought a majority stake in the company from eBay. His compensation included options for 750 ordinary shares, set to vest over five years. A year later, Lee resigned voluntarily to join a startup called Katango, believing he’d earned roughly 20% of that grant under a standard vesting clock.

Skype disagreed. As Fortune reported at the time, Lee’s option agreement pointed to a separate “Management Partnership” document containing a repurchase-rights clause: Skype could buy back an employee’s shares — including shares that had already vested — at the original grant price if that employee left before a sale of the company closed. TechCrunch obtained and published the actual clause language, which routed vested shares “into the repurchase and other provisions” of that separate agreement — language TechCrunch’s Michael Arrington called “intentionally incomprehensible.” Fortune’s reporting adds an important detail: the clause applied only to US employees hired after the Silver Lake takeover, not to staff who’d been at Skype since its eBay days, who kept standard Silicon Valley terms.

The timing made it more than a contract dispute. Microsoft’s $8.5 billion acquisition of Skype was expected to close within weeks of the story breaking, per Fortune, and CBS News reported that Skype had fired a number of executives shortly before the deal closed — terminations that meant those executives lost out on the accelerated vesting a “change in control” would normally trigger, because their agreements didn’t guarantee it. Skype told the press the fired employees would still receive “75 percent of what they would have otherwise received,” according to CBS. Arrington’s judgment on the underlying clause was blunt: “If Skype wasn’t crystal clear with them, and explained it in normal human language that they understood, then these employees were intentionally misled… This is what lawyers call fraud.”

Two things about Skype’s terms were unusual, and both are worth knowing before you sign anything: the five-year vesting period itself departed from the market standard, and the repurchase-on-departure clause extended to shares that had already vested — the one thing vesting is supposed to protect.

What standard vesting actually looks like

Most startup equity — for employees and founders alike — vests on the same schedule: four years total, with a one-year cliff. Nothing vests during the first 12 months. At the cliff, 25% of the grant vests in a single block. After that, the remaining 75% vests in equal monthly installments — 1/48 of the original grant each month — over the next three years. Startups.com’s lexicon and equity-management platform Eqvista’s guide describe the same structure, and it shows up identically across cap-table software and standard law-firm stock agreement templates.

The cliff isn’t arbitrary. It exists to stop someone from taking on a meaningful equity stake and leaving within weeks, before they’ve contributed anything close to what the grant assumes. Remarkable Magazine has covered Harvard Business School researcher Noam Wasserman’s finding that 73% of founding teams split their equity within the first month of starting a company — often before anyone can know who will actually stay and do the work. A vesting schedule with a real cliff is the mechanism that lets a split survive being decided too early: if someone leaves in month three, the company isn’t stuck having handed over stock for nothing.

Founders aren’t automatically exempt

It’s tempting to think vesting is an employee thing — founders already own their shares, bought at a nominal price when the company incorporated. Investors don’t see it that way. Nearly every institutional financing round requires founders to put their own stock on a vesting schedule too, through what’s typically called reverse vesting: the company retains the right to repurchase a founder’s unvested shares if they leave early, even though those shares were already issued. One common compromise, described in Eqvista’s guide to founder vesting, credits a founder for roughly a year already worked and vests the remainder over the following three years — acknowledging the risk they already took on without giving them a free pass on the years still ahead.

The clause that actually protects you: single-trigger vs. double-trigger acceleration

Vesting says when you earn your equity under normal circumstances. Acceleration clauses say what happens to your unvested equity if the company is sold. There are two versions, and the difference is exactly what Skype’s fired executives were missing.

Single-trigger acceleration vests your remaining shares immediately when one event happens — typically the sale itself. Pulley’s guide to the two structures notes that investors generally dislike this version, because a key employee who’s already fully vested “may no longer have a great incentive to stay with the company post-acquisition.”

Double-trigger acceleration, the version investors actually favor, requires two events: a sale of the company, and the employee being terminated without cause (or leaving for “good reason”) within some window afterward. Pilot’s glossary describes it as protecting an employee’s unvested equity specifically in the scenario where an acquirer buys the company and then lets them go — while still giving the acquirer confidence they won’t have to pay out a wave of accelerated equity to people who choose to leave on their own.

Skype’s executives had neither protection working in their favor. Without a double-trigger clause guaranteeing accelerated vesting on a termination tied to the sale, Skype could fire them just before the Microsoft deal closed and keep their unvested shares — which, court-of-public-opinion objections aside, is precisely what the contracts as written allowed.

What to actually check before you sign

• Read the actual stock or option agreement, not just the summary. Skype’s repurchase clause lived in a separate “Management Partnership” document that most employees never closely read — exactly the kind of clause a term-sheet summary won’t surface.
• Confirm your acceleration is double-trigger, not none. A sale of the company protects you far less than you’d think if your unvested equity has no acceleration clause tied to what happens to you after that sale.
• Ask whether repurchase rights survive vesting. Under standard terms, once shares vest, a departure — voluntary or not — shouldn’t put them back on the table. If a clause lets the company buy back vested shares at the original grant price under any circumstance, that’s a deliberate departure from the market standard, not boilerplate.
• Notice if your vesting period itself is non-standard. Skype’s five-year schedule was already outside the typical four-year norm before the repurchase clause made it worse. A longer-than-usual vesting period is a legitimate question to ask about, not a detail to skim past.

Related reading

• How to Split Equity Between Co-Founders — the decision vesting schedules are built to protect once it’s made.
• How Dagne Dover’s Founders Chose Patient Capital Over VC — three co-founders who structured ownership together and are all still there over a decade later.
• Six Months, $80 Million: How Maor Shlomo Built Base44 Alone — no co-founder, no vesting dispute to worry about.