What is Back-loaded vesting?
Back-loaded vesting is a form of vesting scheme, where the founder or employee receives a smaller amount of shares at the beginning of the vesting period, (usually the first 2-3 years) and a higher percentage the longer they are working for the company.
Example of Back-loaded Vesting
Let’s take an example of a 4-year back-loaded vesting scheme with a 1-year cliff (where no shares are vested). Employees gain full ownership like this:
- no shares in the 1st year because of the 1-year vesting period
- 10% in the end of the 2nd year
- 35% in the end of the 3rd year
- 65% in the end of the 4th year
- and 100% in the end of the 5th year.
On the image below you can see how this differs in comparison to the traditional time-based vesting schedule.
Companies use this strategy to boost employee retention. This means that if the employee leaves the company earlier, proportionally fewer shares are vested, than when the employee leaves later.