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milestone-vesting
Option Schemes Published:  Jul 11, 2022 4 min read

Milestone vesting: What it is and how to set it up

Many startups use share vesting to attract talent. Often, early stage startups can’t offer high salaries. Instead, they can give staff the chance to earn shares in the company.

When setting up a share scheme for your employees you need to establish a vesting schedule that’s right for your business. Vesting means the employees have to earn their share options, rather than having them issued directly.

In this article, we’ll cover everything you need to know about milestone vesting.

What is milestone-based vesting?

With milestone vesting, shares in a company are granted only when pre-established milestones or criteria are met. Consultants, advisors and employees all qualify for milestone-based vesting and there isn’t one rule for all.

However, as advisors and consultants usually stay at a company for a shorter period of time compared to employees, milestone-based vesting may be more suitable than time-based. If the advisor has come onboard to help with a funding round, their options may vest on completion of that specific deliverable.

This isn’t always the case though. Milestones can be perfectly relevant for employees. For example, your Head of Sales may have an agreement in place where their equity will vest over a three year period, so long as the desired revenue goals have been met.

What are the benefits of milestone-based options?

Milestone vesting gives founders complete control as it prevents the situation of equity being granted to anyone that hasn’t earned it. Vesting can be milestone based or time based.

There are many cases where time-based vesting is best, or enough. However, in some cases, you might want to add an alternative incentivising layer as time vesting may not be appropriate. This is particularly for roles where there are clear goals the option holder is responsible for (e.g. marketing and web traffic, sales and revenue or engineering to deliver a particular sprint of a project).

To use an example, let’s say you are granting 2% to an incoming VP of Marketing, and this 2% equates to 20,000 shares in your company. These 20,000 shares will vest upon certain marketing deliverables being hit.

This is a fantastic way to really push the VP to hit the targets you want them to hit as it ensures accountability and incentivises people to be rewarded on the merit of their performance and not just tenure.

Who is eligible for milestone-based options?

Milestones aren’t just for employees either. Let’s say you’ve engaged a consultant to build a minimum viable product (MVP).

Typically, you would define a set of deliverables and pay them when they hit those deliverables. Consultants may expect cash but some also may prefer equity, and if cash is tight, this is a great way to build a product.

Making your vesting milestone clear

Milestones are a great way to keep staff engaged. But that only works if the milestone is clear and achievable. If the milestone is subjective or open to interpretation, you may run into problems down the line.

Here are three points to keep in mind:

  1. Avoid ambiguity.
  2. Avoid over complex conditions. Simplicity is key.
  3. Milestone vesting condition ideas

Your vesting milestone condition must be tangible or measurable. There cannot be any room for interpretation or subjectivity.

Milestone vesting condition ideas

If you have no idea how to decipher which milestone to choose, we have analysed our own data and compiled a list of the most chosen milestones SeedLegals’ users typically go for.

We have broken these into the three most popular categories: commercial, achievement and value-based.

Commercial-based vesting conditions

Hiring a sales team member? Onboarding a new COO? These commercial conditions set out below are some of the most often used by SeedLegals’ users.

  • Contribute to a net profit of at least X after Corporation Tax over X financial years
  • Hit £X per quarter
  • £X in MRR from X
  • When the Company records an annual profit of £X
  • When all KPIs are met

Achievement-based vesting conditions

Conducting your bi-annual or quarterly employee review? Tie these into the review as a means of motivating your staff.

Traction based:

  • Grow email list by X subscribers every year for X years
  • X subscribers to the platform
  • X users on the platform
  • Social media exposure of X

Project based:

  • Completion of MVP
  • Completion of works to a value of £X
  • Delivery of X
  • On the set up of an EMI scheme
  • Completion of X project

Performance based:

Upon completion of participating in bi-weekly calls with the management team to provide senior guidance and discuss strategy and progress.

  • Leading X quarterly workshops of 2-3 hours each on X to educate the team on X
  • Perform X hours of work related to X
  • Completion of X days of contracted work
  • Completion of X consulting days
  • Upon the sale of the X product
  • X hours worked

Value-based vesting conditions

These conditions can be very appropriate for leadership positioned staff and often even relevant for junior-mid level employees where you are keen for everyone to push and work towards the same exit goal, even if used as a top up.

  • The company reaches an exit value of £X
  • Directly sourcing £X funds for the upcoming round
  • Completion of £X funding round

Not sure which milestone vesting schedule is right for you? Speak to an expert

If you are interested in learning more about the power of milestone-vesting or you are simply still unsure which milestones would be appropriate, book a call with one of our experts to talk about what is best for you.

 


Hugo Hiley Seedlegals

Hugo Hiley

One of our Equity Strategists, Hugo is a qualified lawyer who caught the tech bug. He loves helping startups understand and manage their equity.
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