Two-Minute Legal Clinic: Using Milestones for Vesting Employee Equity Compensation

In this Two-Minute Legal Clinic, Scott Levine explains why tying equity compensation to milestones is the best way to align employees and advisors at an early-stage business.

It’s my experience that the best way to align employees, advisors, and the people helping you grow your early-stage business is to tie their compensation to milestones. At least some portion of it. Perhaps the equity, or the long-term economic portion.

Oftentimes the pitch is, “I’m going to pay you equity every month, because I can’t afford to pay you cash.” Put the tax implications aside for a moment. What does that mean for alignment? Does it push everyone to reach important milestones fast? Or does it mean that the slower you get to the milestones, the more equity everyone earns? If there’s no incentive to knock down a milestone quickly, the equity award loses its value from the company’s standpoint.

What we recommend

We recommend that you look at your company’s critical milestones. Then say, “When we get to this next milestone (for example, technology completed or first customer), our valuation story improves. When we get there, whatever amount of equity you’re receiving will vest, provided you’re still working for us when we hit the milestone.”

What does this approach accomplish? It forces everyone to focus on the milestone. Everyone thinks, “Since my equity vests when we get the technology completed, I’d better do everything I can to help get the technology complete.” And it doesn’t matter whether it takes a month, six months or a year, because the equity vests when you get to the milestone.

This boosts everyone’s incentive. When you get to the milestone, you can set new ones with vesting provisions.

Read Scott’s full bio