Imagine Sarah, your VP of Engineering, coming into your office with a look of concern. She's been with your startup since its early days, working tirelessly to build your tech stack from the ground up. Now at 45, with 15 years of service under her belt, she tells you she's contemplating retirement in the next couple of years. The worry is clear in her eyes; her stock options are still tied to a traditional vesting schedule that would make her wait another five years to fully benefit. Sarah fears she'll have to choose between retiring without reaping the full rewards of her dedication or staying on longer than she'd like.
This is where the Rule of 60 could come to the rescue. Instead of sticking to rigid, time-bound vesting schedules, what if you had a flexible framework that could reward both years of service and age? By adding Sarah's age of 45 to her 15 years of service, she hits the magic number of 60. Under the Rule of 60, she'd be eligible for accelerated vesting, allowing her to retire without leaving a significant chunk of her equity on the table. For founders and business owners like you, understanding and implementing the Rule of 60 in your stock vesting conditions could be the game-changer in how you attract, retain, and fairly compensate your most valuable asset—your people.
What is Rule of 60?
The Rule of 60 is a provision that combines both age and years of service to determine eligibility for certain benefits, like stock vesting. It is often used in the context of retirement benefits, but startups and other companies increasingly employ it for stock options or restricted stock units (RSUs).
The Math
To use the Rule of 60, simply add the employee’s age to their years of service with the company. If the sum is 60 or greater, the employee satisfies the Rule of 60.
Example:
Employee Age: 30
Years of Service: 32
Sum: 30 (age) + 32 (service) = 62 (greater than 60)
In this case, the employee would meet the requirements for any benefits tied to the Rule of 60.
Why Does It Matter?
As you're steering the ship of your startup or established business, you might wonder why the Rule of 60 should even be on your radar. Here are some benefits that your company might enjoy out of it:
1. Aligns with Modern Career Trajectories
In the gig economy and the world of serial entrepreneurship, the concept of a "job for life" is becoming increasingly rare. Modern career paths are zig-zags rather than straight lines. The Rule of 60 accommodates this new career paradigm by providing a more nuanced approach to benefits, unlike rigid, time-bound vesting schedules.
2. Empowers a Multigenerational Workforce
Today's workplaces often consist of a mix of Baby Boomers, Gen Xers, Millennials, and Gen Zers. Each generation has its own career needs and expectations. The Rule of 60 offers a balanced framework that can be appealing to a wide age range, helping you cultivate a more diverse and inclusive work environment.
3. Fosters a Culture of Recognition
Your team is more than just a collection of roles and responsibilities; they're people who bring unique experiences and lifetimes of learning to your venture. The Rule of 60 implicitly acknowledges that both an employee's length of service and their life stage are valuable metrics for recognition. This fosters a culture where people feel seen and appreciated.
4. Financial Health and Planning
Equity often represents a significant part of an employee's financial planning. The Rule of 60 provides a more predictable pathway for employees to fully vest their stocks, which in turn impacts their financial stability and long-term planning. This financial security can lead to higher levels of job satisfaction and mental well-being.
5. Facilitates Succession Planning
For you, as a business owner, effective succession planning is crucial for long-term success. When senior employees know that they can benefit earlier due to the Rule of 60, they may be more willing to mentor younger employees and prepare them for leadership roles. This ensures that your company's intellectual capital is preserved and effectively passed down.
By integrating the Rule of 60 into your equity compensation plan, you're making a strategic move that goes beyond just numbers and vesting schedules. You're nurturing a work environment that recognizes the multifaceted contributions of its members, contributing to both individual and organizational growth.
6. Attract Talent
Top-tier talent often looks for more than just a high salary; they want a stake in the company. A Rule of 60 provisions can make your stock options more attractive.
7. Retain Employees
When your team members understand they'll gain more benefits by staying with your company longer, you’re incentivizing long-term commitment.
8. Fairness
The Rule of 60 offers a balanced approach, recognizing both the age and service of your employees, which could lead to a more equitable work environment.
Common Vesting Schedules
When it comes to granting equity, one size doesn’t fit all. Different companies have different goals, cultures, and stages of growth, all of which are reflected in their chosen vesting schedules. Before exploring how the Rule of 60 interacts with or modifies these schedules, let’s expand on the typical types of vesting arrangements you might encounter.
1. Cliff Vesting
In a cliff vesting schedule, timing plays a crucial role. Employees must stay with the company until a specific milestone is reached, often after 3 or 4 years, to have any of their stock options vest. This milestone can either be a godsend or a cliff edge—depending on whether you stay or leave just before reaching it.
It also serves as a psychological tool. The closer employees get to the cliff date, the less likely they are to leave, avoiding what behavioral economists call a "sunk cost" of time and effort.
2. Graded Vesting
Graded vesting offers incremental gains over time, often on an annual or monthly basis, making it the most flexible and employee-friendly. This can accommodate different life events and career changes, providing a safety net of sorts.
With this model, employees can see a clear, direct benefit to their continued service at regular intervals, which can serve as an ongoing motivator.
3. Accelerated Vesting
Accelerated vesting is like a fast-forward button, often triggered by specific events like a merger or acquisition. This allows employees to fully or partially vest their stocks ahead of schedule.
During such transitional periods, accelerated vesting serves as a retention tool to keep key talent onboard, ensuring a smoother transition and sustained performance.
4. Performance-based Vesting
This less common but increasingly popular method ties vesting to performance milestones, such as achieving revenue targets or project completions. It aligns closely with a meritocratic culture and can drive high performance.
If you go down this route, it's essential to pick metrics that are within the control of the employee and align with your company's long-term goals.
Understanding these common types of vesting schedules gives you the foundational knowledge to appreciate the distinct advantages and nuances of implementing the Rule of 60 in your own company. Each method has its merits and drawbacks, but the Rule of 60 adds an additional layer of flexibility and fairness that can be adapted to various corporate philosophies and employee demographics.
Rule of 60 in Practice
Some companies create a hybrid vesting schedule that incorporates the Rule of 60. For instance, you might have graded vesting for younger employees with fewer years of service and accelerated vesting that kicks in once the Rule of 60 criteria are met.
If you’re considering a future exit strategy, the Rule of 60 can provide clarity and security to your employees during uncertain times. This can help keep the team focused and aligned with your goals.
Advantages and Disadvantages of Rule of 60
Equity compensation can be a double-edged sword, offering both compelling benefits and potential pitfalls. The Rule of 60 is no exception. Here’s a list of upsides and downsides to arm you with the information you need to make an informed decision.
Advantages
- Incentivizing Longevity: One of the most apparent advantages is the promotion of employee retention for the long haul. When people realize that sticking around could lead to accelerated vesting, they’re less likely to jump ship.
- Bridging the Gap: The Rule of 60 can serve as a bridge between traditional retirement benefits and modern equity schemes, making it easier for employees to visualize a stable financial future without having to job-hop.
- Competitive Edge: In industries where competition for top-tier talent is fierce, the Rule of 60 can serve as a differentiator. It provides an additional layer of allure to your total compensation package.
- Beyond Silicon Valley: Not just tech startups, but companies in traditional sectors looking to modernize their employee benefits can also use the Rule of 60 to compete with newer, more agile companies.
Disadvantages
- Complexity: While the Rule of 60 brings flexibility, it can also introduce administrative challenges. Your HR and legal teams will need to keep track of nuanced vesting conditions, which may require specialized software or additional manpower.
- Legal Hurdles: Your legal team must carefully draft these special provisions to ensure they don’t conflict with existing employment laws or regulations, which can be a complex task.
- Potential for Age Discrimination: Though designed to be fair and balanced, the Rule of 60 can inadvertently favor older employees over younger ones. If not carefully implemented, this could open the door to age discrimination concerns.
- Perception vs. Reality: Even if the rule is legally sound and equitably structured, the perception of favoring one age group over another can have a detrimental impact on company culture.
Possible Rule of 60 Integration for RSUs
Incorporating the Rule of 60 with RSUs might mean creating a modified vesting schedule that combines age and years of service. This schedule can allow for accelerated vesting based on the Rule of 60 criteria.
Some companies design their RSU plans to include 'trigger events,' which allow for accelerated vesting. Here, the Rule of 60 could serve as such a trigger, enabling employees to fully vest their RSUs if their age plus years of service equals or exceeds 60.
One of the benefits of RSUs is the ability to defer taxation until vesting. If the Rule of 60 is implemented, employees may face tax implications sooner than under a traditional vesting schedule. Always consult a tax advisor to fully understand the implications.
However, like any other equity arrangement, implementing the Rule of 60 within RSUs requires careful consideration to ensure fairness. Your legal team should review the terms thoroughly to make sure they align with employment laws and anti-discrimination policies.
Transparency is crucial. Any changes to RSU vesting schedules, including Rule of 60 provisions, must be communicated clearly to all affected parties to ensure complete understanding and compliance.
Bottomline
The Rule of 60 can be a powerful tool in your arsenal to attract, retain, and fairly compensate your employees. It represents a blend of traditional and modern approaches to employee benefits. Implement it wisely and you'll not only give your employees a compelling reason to stick around, but you'll also build a more committed, satisfied, and productive workforce.
For a tailored RSU equity plan that suits your company's needs and employee incentive goals, book a demo with Upstock today.
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