Vesting schedules, a cornerstone in the realm of investments, have found their way into the ever-evolving domain of cryptocurrencies. In essence, a crypto vesting schedule dictates the timeline and conditions under which an investor can access or sell their digital assets. This mechanism safeguards both the company issuing the crypto and the investors, ensuring long-term commitment and strategic financial decisions. In this comprehensive guide, we delve deep into the specifics of crypto vesting schedules, exploring their facets, their varied types, and their implications for investors and issuers alike.
How Does the Crypto Vesting Schedule Work?
A crypto vesting schedule works as a predefined set of rules determining when and how cryptocurrency tokens allocated to employees, founders, or investors become available for them to sell or transfer. The goal is to motivate participants to commit to the project’s long-term success.
- Incentivize Long-Term Commitment: By delaying full access to tokens, stakeholders are encouraged to stay committed to a project’s long-term success.
- Stabilize Token Prices: Abrupt selling can destabilize token prices. Vesting mitigates this by distributing sales over time.
- Protect Investors: Prevents company insiders from dumping their tokens immediately after a public sale.
How do you structure a vesting schedule?
Vesting schedules can vary based on the company’s objectives and the nature of the stakeholders involved. A vesting schedule is structured based on the duration of the vesting period, cliff periods (if any), and the frequency of vesting events. Here is what these factors of vesting schedule structure mean:
- Duration of Vesting: How long before all tokens are vested? Common periods are 1-4 years.
- Cliff Period: A period at the start where no tokens vest. It could be months or even a full year.
- Vesting Frequency: After the cliff, tokens might vest monthly, quarterly, or annually.
What is 4-year vesting?
To understand 4-year vesting: It’s a common schedule where tokens or shares vest over a four-year period. Typically, this includes a one-year cliff, meaning if the participant leaves before one year, they get nothing. But after this one-year mark, a quarter of the total grant vests, and subsequently, the vesting occurs monthly.
Here’s a hypothetical scenario: Let’s say a startup grants an employee 1,200 tokens with a 4-year vesting period. The setup might be such that the employee doesn’t get any tokens in the first year (a one-year cliff). Post-cliff, 300 tokens vest every year, which breaks down to 25 tokens per month for the next three years.
What are vesting cliffs?
A vesting cliff is a period at the start of the vesting schedule during which no tokens or shares vest. Only after this period will the vesting start, often in linear fashion.
Adoption of 1-Year Vesting Models
With the rapidly evolving nature of the crypto industry, some entities have adopted a 1-year vesting model. This shorter timeframe allows for greater flexibility, yet demands quicker results and commitment.
The rapid evolution of the crypto realm has intensified interest in shorter vesting models, such as the 1-year structure. This transition seeks to balance swift liquidity with unwavering commitment. While traditional 4-year vesting aims at long-term stability, the 1-year model is about agility, adaptability, and immediate results.
| Criteria | 1-Year Vesting Model | Traditional Vesting Models (e.g., 4-Year) |
| Liquidity | High liquidity due to shorter duration. | Liquidity is spread over a more extended period. |
| Adaptability | Quick adaptability to crypto’s volatile landscape. | Steady and planned adaptability, considering long-term goals. |
| Commitment | Requires immediate results and intense involvement. | Focused on long-term stability and sustained commitment. |
| Target Audience | Appeals to stakeholders wanting quicker returns. | Attracts those aligned with the project’s long-term vision. |
Is Coinbase’s 1-Year Vesting Schedule Effective?
Coinbase, a prominent name in the crypto sphere, adopted the 1-year vesting schedule. This move was deemed effective in retaining talent while ensuring swift project advancements. Furthermore, the model resonated well with stakeholders yearning for quicker liquidity. The company reported fewer cases of early exits post-vesting, indicating the model’s effectiveness.
Did Lyft and Stripe Successfully Implement 1-Year Vesting in 2021?
In 2021, both Lyft and Stripe explored the 1-year vesting schedule. Their objective was to realign their operational strategies with the ever-evolving dynamics of the crypto domain. Preliminary insights suggest that this shift bolstered their agility, allowing them to deftly navigate the crypto market’s volatility. Both companies witnessed enhanced stakeholder engagement, and the accelerated vesting model complemented their growth trajectories.
Pros of 1-year vesting models
Benefits of a shorter vesting model include:
- Quick Turnaround: Companies can expect faster results from participants.
- Flexibility: As the crypto industry evolves, this model can adapt more readily.
- Attracting Talent: Professionals might be lured by the potential for quicker returns.
Cons of 1-year vesting models
Drawbacks of this approach encompass:
- Short-term Vision: Stakeholders might focus on immediate gains over long-term growth.
- Higher Turnover: Participants might exit post-vesting, leading to higher attrition rates.
Examples of different vesting designs?
Various vesting schedules cater to different company goals and stakeholder dynamics. Common designs include linear vesting, milestone-based vesting, and cliff vesting.
| Vesting Design | Description | Example |
| Time-Based Vesting | Ownership accrues over a specific period. | An employee gains 25% ownership of their stock options after one year, with the remaining 75% vesting over the next three years. |
| Milestone-Based Vesting | Ownership is contingent upon achieving specific goals. | Founders vest shares only when the company achieves a certain level of revenue or user growth. |
| Hybrid Vesting | Combines time-based and milestone-based vesting. | Employees receive 25% ownership after one year and an extra 10% if specific targets are met. |
| Retirement Vesting | Pertains to retirement plans and employee entitlement to employer-contributed benefits. | Employees become fully vested after a certain number of years of service. |
What is an example of a vesting schedule in crypto?
Consider a startup that grants an employee 1,200 tokens with a 4-year vesting schedule and a one-year cliff. After one year, 300 tokens will vest. From the second year, 25 tokens will vest monthly.
Here are additional examples of vesting schedules in crypto:
- Linear Vesting: In this type of vesting, tokens are released gradually over a specified period, usually on a monthly or quarterly basis. For instance, 25% of acquired tokens might be released after 6 months, another 25% after 12 months, and so on.
- Cliff Vesting: This approach involves a waiting period (cliff) before any tokens are released. For example, there might be a 6-month cliff, after which tokens are released linearly over the remaining vesting period.
- Advisor and Team Vesting: Team and advisor tokens often have more extended lockup periods. For instance, they might be subject to a three-year lockup with quarterly unlock events and a six-month cliff.
- Customized Vesting: Projects can create customized vesting schedules based on their specific needs and goals. These schedules can vary widely in terms of duration, release frequency, and the existence of cliffs.
Streamflow and Token vesting
Streamflow is a protocol upgrade that introduces a new token vesting mechanism. It’s designed to better align incentives between token holders and network security, ensuring long-term sustainability.
