Vesting: Earning Your Equity Over Time

One-sentence takeaway: Vesting is like a delayed gratification plan for your equity, ensuring you earn your ownership stake by contributing to the company’s success over time.

Think of company equity—stock options or restricted stock units (RSUs)—as a pie. Vesting is the process of earning your slice of that pie over a set period, typically several years. It’s a way for companies to incentivize employees and ensure they stick around to contribute to the company’s growth. It also protects the company if someone leaves early.

How does vesting work?

Vesting schedules outline how and when you earn your equity. A common vesting schedule is “four-year vesting with a one-year cliff.” Let’s break that down:

• Four-year vesting: This means it takes four years to fully earn all your equity.
• One-year cliff: This means you don’t earn any equity until you’ve worked at the company for one full year. After that first year, you typically “vest” a portion of your equity (25% in this example).
• Vesting frequency: After the cliff, vesting often occurs regularly, such as monthly or quarterly. So, after your one-year cliff in a four-year vesting schedule, you might vest another 1/36th of your total grant each month for the remaining three years.

Example: Imagine you’re granted 4,000 stock options. With a four-year vesting and one-year cliff:

• Year 1: You don’t own any options until the end of the year. Then, you vest 25% (1,000 options).
• Years 2-4: Each month, you vest another 1/36th (about 28 options) of your total grant, until you reach 100% ownership after four years.

Different types of vesting:

• Time-based vesting: This is the most common type, as described above. You earn equity simply by staying with the company.
• Performance-based vesting: This type links vesting to specific company milestones, like reaching a certain revenue target or launching a new product. It’s less common for rank-and-file employees and more often used for executives.

Why is vesting important?

• For employees: Vesting provides an incentive to stay with the company and contribute to its long-term success, ultimately increasing the value of your equity. It also ensures you are rewarded for your time and effort.
• For companies: Vesting helps retain valuable employees and align their interests with the company’s goals. It prevents early departures from taking large chunks of equity with them.

What happens if you leave the company before fully vesting?

Any unvested equity is typically forfeited back to the company. You only retain ownership of the portion you’ve vested. It’s crucial to understand your vesting schedule details and plan accordingly, especially if you’re considering leaving your job. Earlyasset’s Portfolio Tracker can help you monitor your equity and spot optimal liquidity windows.

Learn More: Vesting Schedule Learn More: Vesting Schedule Decoding Your Grant Learn More: Stock Options Learn More: RSUs - Restricted Stock Units

So here’s what we covered:

• Definition of vesting and its purpose
• How time-based vesting works, with an example
• Different types of vesting (time-based and performance-based)
• Why vesting matters for both employees and companies
• What happens to unvested equity if you leave the company
• Links to related resources on Earlyasset’s Asset University