An equity refresh grant is an additional stock option or stock award given to an existing employee, so they keep holding unvested equity after their first grant finishes vesting. Most startups start giving refreshes as early hires reach two to three years of service, either to key people case by case or to everyone on an annual cycle. Refresh grants usually vest over four years with no cliff, are priced at the current 409A value and come out of the option pool, so plan for them when you size the pool.
Key takeaways
- When a four-year grant finishes vesting, the employee has nothing left to stay for. A refresh fixes that before it happens.
- The two common approaches are targeted refreshes for key people and annual refreshes for everyone eligible.
- Refreshes usually vest monthly over four years with no cliff, because the employee has already proven themselves.
- Size refreshes by a percentage of the original grant or by guidelines for each level, stated as an exact number of shares.
- Each refresh needs board approval, an exercise price at least equal to the current 409A, room in the plan’s share reserve and a check against the Rule 701 limits.
Why do startups give refresh grants?
Equity is meant to keep people building the company over the long term, but a standard new-hire grant only does that for four years. As the last tranche approaches, an employee’s unvested equity shrinks toward zero, and a competitor’s offer with a fresh four-year grant starts to look better. That’s the retention cliff, and it tends to hit your earliest and most valuable people first.
Refreshes also fix two other problems. Early employees received large share grants at a low price, while later hires get fewer shares at a higher price, and promotions can leave someone with equity sized for their old job. A refresh lets you reward performance and keep equity in line with each person’s current role.
When should a startup start giving refresh grants?
Seed-stage companies rarely need a program. Grants are new and the team is small. The question usually comes up around Series A or B, when the first hires are two to three years in. Start planning then, because a refresh granted at the start of year three or four has time to take over as the first grant runs out.
| Approach | How it works | Pros | Cons |
| Targeted | The board grants refreshes to selected people, often top performers, promotions or anyone with low unvested equity | Uses the pool where it matters most | Can feel arbitrary without clear criteria |
| Annual | Everyone eligible is considered each year, usually with the performance review | Predictable, and overlapping grants mean no one hits a cliff | Uses more of the pool and needs a yearly process |
| End of vesting | A larger grant as the first grant nears its end | Simple to explain | A single date to plan around, and value can swing a lot in one year |
A practical default for most startups is targeted refreshes for key people beginning around year two or three, moving to an annual program as the company grows past about 50 employees and builds a regular compensation cycle. Write down whichever approach you choose in your compensation philosophy so managers and employees know what to expect.
How should refresh grants vest?
Most refresh grants vest monthly over four years with no cliff. A cliff exists to protect the company from a new hire who doesn’t work out, and an employee who has been there for years has already cleared that test. Some companies use a shorter cliff, and some start a refresh’s vesting when the original grant ends, so the two don’t overlap. Keep acceleration terms consistent with the employee’s original grant unless the board decides otherwise. See Vesting Schedule.
How big should a refresh grant be?
Three methods are common. You can grant a percentage of the original award, such as a quarter of the original share count each year. You can follow guidelines that set a share range for each level, based on the current share price. Or, at later stages, you can target a dollar value of unvested equity for each level and top people up to it. Whichever you use, set ranges rather than fixed numbers, so managers can reward performance, and state every grant as an exact number of shares, not a percentage. See Why Use Exact Share Numbers?
Example. An engineer joined with 80,000 options at $0.20 per share, vesting 20,000 a year. At the start of her third year, she has 40,000 options left to vest and will have none two years later. The company, now past its Series B with a 409A value of $1.50, grants her a refresh of 20,000 options at $1.50, vesting monthly over four years with no cliff. That adds 5,000 options a year through her sixth year, and the company can add to it in later years.
Now the company view. Say 15 employees are eligible this year, with original grants averaging 40,000 options. A refresh of a quarter of the original grant is 10,000 options each, or 150,000 in total. The hiring plan needs another 400,000 options over the next 12 months. If the pool has 600,000 options available, the refreshes and new hires use 550,000 of them, leaving very little cushion. That’s the signal to plan a pool increase before the next round. See Employee Option Pool.
What legal and tax rules apply to refresh grants?
Board approval and pricing. Every refresh is a new grant, approved by the board or a committee it authorizes. Options must be priced at no less than fair market value on the grant date, so you need a current 409A valuation. A refresh’s exercise price will usually be higher than the original grant’s. See 409A Valuation.
Plan capacity. Grants can’t exceed the shares reserved under your equity incentive plan. Increasing the reserve needs board approval. Stockholders must also approve the increase within 12 months for the new shares to support ISOs, and your charter or investor agreements may require preferred stockholder consent. See Employee Stock Option Plan.
ISO limits. Only $100,000 worth of ISOs, measured at grant, can first become exercisable for an employee in any calendar year. A refresh that vests alongside the original grant counts toward the same limit, and anything over it is treated as an NSO. As always, grant ISOs to US employees and NSOs to everyone else. See NSO vs ISO.
Rule 701. Most private companies issue employee equity under the SEC’s Rule 701 exemption. In any 12-month period, the total sold under it can’t exceed the greatest of $1,000,000, 15% of the company’s total assets, or 15% of the outstanding shares of the class being offered. Options count when granted, at their exercise price. In the example above, 550,000 options at $1.50 is $825,000, which is under $1,000,000 by itself. If grants in a 12-month period total more than $10,000,000, the company must give recipients extra disclosure, including financial statements, before they exercise. Track the running total as refreshes and new hire grants add up.
Tax. Refreshes are taxed like any other option of the same type. Employees should talk to a tax advisor about exercise timing. Outside the US, local tax and securities rules apply to each grant.
Checklist for a refresh program
- Decide who is eligible and when, and write it in your compensation philosophy.
- Set sizing guidelines by level, in shares.
- Model the pool for refreshes plus the hiring plan for the next 12 to 18 months.
- Confirm the 409A is current before each grant date.
- Check the ISO limit for each recipient and the Rule 701 totals for the company.
- Get board approval, issue grant notices and update the cap table.
For more, see Stock Options, Startup Employee Equity, Startup Equity Compensation and Equity Dilution.
If you’d like help setting up or expanding your equity plan, see our employee stock option plan and stock option grant services, or contact us.
