Planning to offer a better form of compensation to the employees in your company? With the competitive nature of the job market these days, many firms are looking for new ways to attract and retain their employees. And one of the best ways for compensating employees is through share options with a vesting schedule.
With vesting schedules, you will be able to retain the employees in your company for a longer time and also compensate them for their services. And for all types of vesting plans, Eqvista has made some updates in the application that now allows you to easily create complex vesting plans directly through the application and track the shares in your company at the same time. Keep reading to know more.
What is Vesting?
Let us begin by understanding what vesting is. When a company offers employees equity as part of their compensation package, the company is offering them partial ownership. However these shares normally have to vest before the employees can obtain ownership. This means that the staff will have to work for the company over a period of time before they become the owner of the shares.
In short, vesting is the process of earning an asset, which includes employee-matched contributions to a 401(k) or stock options. Business owners normally add a vesting plan to encourage employees to stay for a longer time with the company and perform well so that they can earn their reward.
Understanding Stock Vesting
With stock options like NSOs or ISOs, an employee doesn’t get the actual shares of the stock on the grant date. Instead, they get the right to exercise, which means buying a set number of shares at a fixed price later on. The employee normally has to earn the options over time as they keep working for the company, which is the process of vesting.
But let us say that the owner decides to give their employee RSUs instead. In such a case, they would be giving the employees the company shares at a future date, and not options to buy it. These future shares would also have a vesting plan, as well as some additional requirements such as performance milestones, before the shares are fully vested.
The difference between RSUs and stock options here is that employees would not have to purchase the stock options and would fulfill the set milestones until the shares vest. All in all, vesting is something that every company needs to know about as it is an important form of employee compensation. Other than this, vesting is also used for shares offered to founders and other board members based on the agreements made with the company under specific situations.
An Example on Vesting
With all clear about the reasons for vesting plans, let us now take an example to understand how vesting plans work. Let’s say a company, Best Company Inc., hires a new employee Rocky on November 1st, 2017. And as a part of his compensation package, the company agreed to give Rocky option grants with the following details:
- Grant Date: 11/01/2017
- Options Granted: 192
- Vesting schedule: Monthly for four years with a one-year cliff
Here is an overview of the Vesting Schedule for the first 18 months:
|Nov 1st, 2018||48||48 (192/4 = 48)|
|Dec 1st, 2018||4||52|
|Jan 1st, 2019||4||56|
|Feb 1st, 2019||4||60|
|Mar 1st, 2019||4||64|
|Apr 1st, 2019||4||68|
|May 1st, 2019||4||72|
After one year from the day Rocky was hired (that is 1st November 1st, 2018), he reaches the cliff and 1/4th of the shares are vested. This means that he can now exercise 48 of his shares.
Then over the next 3 years, four shares would vest every month. By November 1st 2021, all of Rocky’s shares would have vested and can then be exercised. Now, let us say that Rocky decides to leave the company before 1st November of 2021. In such a case, Rocky will have to surrender all unvested shares and they would be returned to the company’s option pool.
Creating Vesting Plans on Eqvista
With this said, Eqvista has added a new system to make the process of creating a vesting plan for the issuance of shares much smoother. To begin with, the new system now allows users to create a vesting plan and apply it to as many grants as needed. When the user makes any changes to the vesting plan, it would affect all the grants as well.
Along with this, Eqvista users can also create advanced plans that support all types of vesting including time-based plans, milestone plans and hybrid plans. This means that when a user goes to create a “New Vesting Plan” on Eqvista, they can now select the kind of plan that they want to create. In fact, the interface has also become much simpler and easier to use.
To help you understand the updates, you need to know all about the type of vesting plan available. There are three main kinds of vesting schedules, including time-based, milestone-based, and a hybrid of time-based and milestone-based.
Each has been explained below along with how you can use it on Eqvista.
What is Time-Based Vesting?
Under this kind of vesting, you will be able to earn shares or stock options over time. And most time-based stock vesting plans have a cliff. Most companies normally offer a one-year cliff with a time-based vesting plan. After the cliff, the shares would gradually vest over time. This means that the employee has to stay in the company for at least a year before they can exercise their options.
Otherwise, the company can decide how long the cliff period is to be, and the vesting terms of the stock options after this. If you are planning to use this kind of stock vesting plan in your company created on Eqvista, you can do so easily. This is how the interface would look like:
What is Milestone-Based Vesting?
The second kind of vesting is a milestone-based vesting plan, where the person gets the shares or options after they have completed a certain project or when the person helps the company in achieving a business goal.
Milestone vesting does not have any time related factor in it. It is most appropriate for those owners who find events more important such as accomplishing some tasks, revenue, sales, etc. For instance, let us say that a company is about to tie the vesting plan to the occurrence of “the sale of the company’s major product to a specific retailer”. This means that until the company finalizes a deal with the retailer in question, the shares would not be vested.
But it is important to understand that the objective added with this vesting plan has to be clear. For instance, if the milestone is to sell the company’s product to the major retailer, it would cause disputes as to who the major retailer is. Hence, ensure that the objective is clear if you are about to implement this kind of stock vesting plan in your company.
With this said, Eqvista now allows you to create a milestone-based vesting plan easily. The interface for creating the plan would look like:
What is Hybrid Vesting?
The third kind of vesting is hybrid vesting, which is a combination of time-based and milestone vesting. Under this vesting plan, the person would have to both work for the company over a particular time and hit one or more milestones to get their shares.
This is commonly used for setting a vesting plan over time, but also with some portion of the shares to be received upon some set milestones. This is how it would look on Eqvista.
Creating Vesting Plans on Eqvista
You now know now what the different kinds of vesting plans are that you can use. So, before you head out to issue shares to your employees, you can create the vesting plan on Eqvista.
When you click on the option to create the vesting plan, you will be directed to the following page where you can add in the details to create the plan accordingly.
As shared above, you will have to add the following details for the vesting plan:
- Vesting Plan
- Plan Name
- Vesting Period
- Amount of Shares
Other Vesting System Features on Eqvista
There have been many other updates for the vesting system on Eqvista. The page for the creation of the vesting plan now has a lot of functionality built-in making it highly simple and easy to use.
The main idea of Eqvista was to build an interface where the user can easily set up all of the vesting in just one place without the need for reloading or leaving the page. That is where we have added different functionalities such as the show, edit, and mass apply modes. Each has been explained below.
1. Show Mode
This mode displays information about the plan and shows what kind of grant has been used in the plan. For instance, if the vesting is the milestone plan, the user can easily complete a milestone right from here by pressing the “Complete” button and add the date of completion. As soon as the user selects the date, it would automatically make the changes without reloading the page. It would also calculate the vested shares for all the grants used in this plan.
This how the page would look on Eqvista during the show mode:
2. Mass Applying Vesting Plans
The next feature is the mass apply feature, where users can easily apply the same vesting plan to many grants in one operation without leaving or reloading the page. When the user presses the button, “Apply plan”, the interface would display a new section where they can easily select the type and class that they want to use. And with this, they can then apply the plan to the different grants.
As soon as the user applies the plan, the interface would return back to the “Show mode”, and the vesting plan would be added to the grants.
3. Fully Customizable Vesting
The next mode is the fully customizable vesting mode which activates the edit function without leaving the page. This allows the users to easily make any kind of plan modification on the page accordingly without the need of leaving the page. The edit mode here has every kind of security handle installed in it.
Basically, the system helps control the percentage of milestones or periods and avoids any errors or miscalculations when setting up the vesting plans.
You can see how the error would be displayed in case of false or wrong information in the below image.
Try Out Eqvista Today!
With all these new improvements in Eqvista, we hope this will help with setting up your company’s vesting plans. We will keep updating and developing the system using the latest technology in the market to ensure that our users get the best out of the application. If you are new to Eqvista, then it is time for you to try out the app now! And if you want to know about the various other topics related to equity, strike prices and so on, check out our knowledge center here!