It can be hard for startups to attract great talent.

This is largely because startups don’t have a ton of cash to offer prospective employees.

But many high-performing operators will consider joining an early-stage company for a couple of reasons:

1. the opportunity to take on a big role
2. stock options

The thing about stock options is that not every employee understands how they work. As the founder, it’s up to you to explain it.

This is what we’re gonna talk about today.

Let’s Start with Stock Options

Here's a VERY brief explainer of how stock options work:

When you hire someone, you might give them the option to buy 1,000 shares of your company at $1 each.

That's their strike price.

If the company does well and the shares become worth $10 each later, the employee can still buy the shares for just $1.

Then, when the company goes public or gets acquired, the employee could sell the shares for $10 and make $9 profit per share.

Stock options are a great way for startups to attract top-tier talent without spending all their runway. You can offer lower salaries AND attracting A-players.

They also allow employees to feel like they have ownership in the business, which is a great motivation tool.

If the company does well, the employee will get a big payday. That’s the idea.

Now let’s talk about vesting

Now, it sure would be a bummer if we gave our early employees stock options (ownership in the company) and then they quit 2 months later.

That’s where vesting comes in.

Vesting is basically a fancy way of saying "you earn your equity over time."

Instead of handing someone their full ownership stake on day one, you spread it out over several years.

There is a method to this madness: it can take years and years for a startup to IPO or get acquired. Vesting helps make sure everyone on your team is committed for the long haul, not just looking to grab equity and bounce.

The Standard Deal: 4 Years + 1 Year Cliff

Almost every startup uses the same basic setup. Here's how it works:

The 1-Year Cliff: Once the employee hits the 1 year mark, 25% of their equity will “vest”. This means they have the option to purchase 25% of their promised equity at the strike price that we talked about earlier.

The 4-Year Trickle: After that first year, options vest monthly.

Let’s do some really quick math here.

If you offered a new hire 1,000 shares of your company, that means 250 of those shares would be available on your employee’s 1-year anniversary.

At that point, the employee could purchase 250 shares at their strike price (even if the value of the company has gone up).

After that, 20.8 shares vest every month.

So if the employee resigned after 3 years, she would have the option of purchasing a total of 750 shares. The remaining 250 shares that were promised to her when she joined the team would go back onto the cap table.

The whole purpose behind this system is to incentivize employees to stay at the company, to work super hard to increase the value of the company, and to reward the employees who succeed at both of these things.

The Acceleration Clause

Some companies add what's called "acceleration clauses."

Fancy name, simple concept: if the company gets acquired, employee equity might vest immediately instead of waiting for the full four years.

Pretty cool, and also pretty logical.

Why Everyone Does This

This vesting schedule is super common. Even some venture capitalists use it.

At some VC firms, partners are on 7-year vesting schedules. Seven years! That's longer than most people keep their phones.

Why? Because building something meaningful takes time. Lots of time. Vesting creates what we call "long-term alignment" – basically, everyone's success is tied together. You all win together, or you all keep grinding together.

The goal is to create a team that's genuinely committed to building something amazing together.

When everyone's equity is tied to the long-term success of the company, you get better decisions, stronger teamwork, and hopefully, better outcomes for everyone.