Quarterly vesting schedule for staff incentive ESOP plans

TL;DR: You may have read that a vesting option for your staff is quarterly vesting? Do you know how to calculate it a quarterly vesting schedule, though? I’m going to explain the math now

Don’t’ know how to calculate a quarterly vesting schedule? Yeah, I thought so. Neither did I.

Now, quarterly vesting is not my preferred method, but it is one of the main variables at hand when structuring your ESOP.

But you’ve decided you don’t want to do monthly vesting, and your staff is probably wondering at some point how many shares they have vested.

Great, only now you need to calculate this… That should be simple, right?

Nah.

I would have thought it would be easy(ish) to just Google this, get a formula and BOOOOM. Only I haven’t been able to find one place which explains the calculations in any detail whatsoever. FML and FYL (I just made that up but you get it). Incredibly, there doesn’t even seem to be one focused blog on this topic at all.

I struggle with not knowing, so I got my excel on and did some first principles, shared a few private expletives and did it for y’all.

So I’m going to briefly talk you through how this works so no one else has to suffer the painful experience of thinking.

What is a quarterly vesting schedule?

You grant staff some shares, but if they quit they don’t get them all today. No, no, they gots ta earn em. They pay their dues and they ‘vest’ their shares. Only you can get all tricksy and create terms around this including a cliff… or using quarterly vesting.

Monthly vesting scedule  means if I quit your startup one day after the end of a month I get the benefit of one month of servitude of shares.

But quarterly is more onerous. If I leave after one month of the quarter I don’t earn anything. Nada. Zilch.

If I leave one day before a quarter, I literally get nothing. Only if I leave one day after a quarter (3 months) do I get that benefit.

To be more clear, I join on a certain date, the board approves my shares on a date and my vesting starts on a date. They could be all the same day, they might not be. What staff care about is the day their vesting actually starts.

From the date, their vesting starts, say 1 January to be simples, each three months (unless there is a cliff) they get a quarter of their annual allocation of shares. So end of March, June, September and December.

If you have 4-year vesting (so 25% of total each year), each quarter is 1/16 of the total shares you promised them.

If there is a 12-month cliff (or 4 quarter cliff…), then they get 1/4 in a lump, and then the quarterly vesting starts.

Hey, if you are rolling your eyes, chill, I’m making this as clear as possible so everyone gets it.

What do staff think about a quarterly vesting schedule?

Hmm… I’m thinking of quitting. F this S. I’ve got one month notice and I’m one month into vesting, which means if I hang around another month and do as little as possible, I get another quarter of vesting. Yeah, why don’t I mess about and look after primo.

You might think you are all bling using quarterly vesting but think about reality. If staff want to leave, they are going to leave. Why create an incentive for them to hang about?

Once staff have a bug, they are infectious. They will mess up everyone else with their bad attitude. Get them out the door. Most startups fail so the shares are monopoly money. Why take the risk being greedy?

Quarterly vesting allows staff to think. Thinking is always bad. If your staff are ESOP savvy they may question why you are deviating from the monthly norm and doing quarterly… and if you don’t have a good answer you’ll look like a douche or ignorant. Both are not auspicious.

I actually don’t know a good reason to have quarterly vesting. Sure, prima facia there are academic reasons but scratch the surface and it doesn’t make sense in the real world.

In fact, some have argued you should have daily vesting. Simon Simeonov argues:

I don’t see a big difference between monthly & daily vesting. Daily is probably better. As rule, I like continuous functions–discontinuities and kinks sometimes influence decision-making in bad ways. That’s why I think quarterly vesting is a terrible idea–someone who’s ready to leave may stay on as dead weight for a couple more months to get that extra bit of vesting.

How does quarterly vesting look different to monthly (With a cliff example)?

That was a remedial overview. I tried to keep it brief.

Let’s look at a profile for a staff member, called Akio (An amazing dude!).

Akio has 50,000 options with a vesting date starting on the 1st June 2015. He’s got ISOs and no accelerated vesting.

The acquisition date of the startup is the 1st March 2018.

So here is what Akio’s vesting profile looks like over the proceeding three years. The longer he is there, the more shares he gets.

Now you are probably wondering what’s going on here, so here is some commentary.

The blue line in the back is the monthly vesting schedule. The orange one is a quarterly vesting sachedule and you can see it hitting the same blue line every quarter (hence quarterly vesting).

The grey line assumes there is no cliff. So both the blue and orange one has a cliff. Meaning no shares until June comes along.

How do you calculate a quarterly vesting schedule?

You still want quarterly vesting (or at least the calculations), so here we go. The calculation for quarterly is very similar to monthly. Yes, nerd alert…

Here is a screenshot from the model (It’s a hacked together extract from the monster cap table I have built). It’s easier to see here the differences.

Basically, it’s the same formula but wraps an Excel function called FLOOR which constrains the dates, by rounding down to the lowest multiple of three around one formula.

The syntax is this:

FLOOR(number, significance)

The FLOOR function syntax has the following arguments:

• Number The numeric value you want to round.
• Significance The multiple to which you want to round.

If you look closely at the second row, it starts with FLOOR and then in the middle of the red box, you can see a “,3″ which is where I added the ‘Significance”.

Monthly and Quarterly calcs in Excel

ROUNDDOWN(MAX(0,MIN(E19,IF(DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”)=12,(0.25*E19),IF(DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”)>12,(0.25*E19)+(((DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”)-12)/36)*(E19*(1-0.25))),0)))),0),

ROUNDDOWN(MAX(0,MIN(E19,IF(DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”)=12,(0.25*E19),IF(DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”)>12,(0.25*E19)+(((FLOOR(DATEDIF(H19,IF(ISBLANK(M19),exitdate,M19),”m”),3)-12)/36)*(E19*(1-0.25))),0)))),0),

Formula break down

 ROUNDDOWN(MAX(0,MIN(E19,IF(DATEDIF(H19,IF(ISBLANK(M19),C\$5,M19),”m”)=12,(0.25*E19), If the date equals the 12 month cliff exactly get 25% of the options IF(DATEDIF(H19,IF(ISBLANK(M19),C\$5,M19),”m”)>12,(0.25*E19)+ If the date is greater than 12 month cliff get 25% of the shares PLUS (((FLOOR(DATEDIF(H19,IF(ISBLANK(M19),C\$5,M19),”m”),3)-12)/36)*(E19*(1-0.25))),0)))),0), Calculate the months of vesting, rounddown to the lowest multiple of 3, then deduct one year (the cliff they got) and multiply the number of options (less the quarter of options from the cliff)

There’s some other calculations in there about the cancellation and expiration of shares, but let’s ignore that.

Done

So there are the calculations. This doesn’t really help you since the calculations are reference specific, and it’s a total mind fuck…

So the best thing to do is download the file by clicking on the pretty picture on the right. Then play with it so you understand… you can also just use my spreadsheet! I’m going to release the big upgrade to the Ultimate Cap Table soon, so you’ll get an update when the free cap table is available. It’s a big update!

If you have any questions about the quarterly vesting schedule, sound off in the comments. If I’ve messed something up, do let me know so everyone benefits. I’m self-taught and not perfect 😉