Vesting Schedule: Decoding Your Grant

A vesting schedule determines when you actually own the equity (stock options or restricted stock units) granted by your company. Think of it as earning ownership over time, like slowly unlocking levels in a game. It incentivizes you to stay and contribute to the company’s success.

Key takeaway: Your vesting schedule outlines how much of your equity you own at different points in time, typically over several years.

How it works:

• Grant Date: The day you receive the grant. This is the starting point, but you don’t own anything yet!
• Vesting Period: The time it takes to fully own the granted equity. This is usually several years (e.g., four years is common).
• Cliff: An initial period before any vesting occurs. It’s like a waiting period. For example, a one-year cliff within a four-year vesting schedule means you own nothing until you’ve completed one year at the company. Then…
• Vesting Schedule: After the cliff, the equity typically vests incrementally. A common example is “monthly vesting after a one-year cliff”, meaning that after one year, 1/36th of the shares vest each month until you hit the total number of shares originally granted. Your schedule could also include quarterly, semi-annual, or annual vesting increments.
• Vested Shares: The portion of your grant you officially own. You can exercise vested stock options (buy the shares at a pre-determined price) or freely sell vested RSUs.
• Unvested Shares: You don’t own these yet! If you leave the company before they vest, you forfeit them.

Example:

Imagine you’re granted 48,000 stock options with a four-year vesting period and a one-year cliff.

• Year 1: 0 shares vest.
• Year 2 (after the cliff): 12,000 shares vest (1/4 of the total grant).
• Year 3: Another 12,000 shares vest.
• Year 4: The final 24,000 shares vest and you fully own the equity.

Why Vesting Schedules Exist:

Vesting schedules are mutually beneficial:

• For you: They represent a significant component of your potential compensation.
• For the company: They encourage employees to stay engaged and contribute to long-term growth.

Important Considerations:

• Understanding your grant: Carefully review your stock option agreement or RSU grant documents. They contain the specific details of your vesting schedule. If anything is unclear, don’t hesitate to ask your company’s HR or legal team. It’s common to have questions!
• Planning for Liquidity: Vesting schedules impact when you can sell. Selling Your Shares with Earlyasset: The Process
• Tax implications: Taxes apply to equity compensation. See: Capital Gains Tax and Ordinary Income Tax on Equity Compensation

So here’s what we covered:

• Grant date, vesting period, cliff, and vesting increments
• Vested vs. unvested shares
• The purpose of vesting schedules
• Where to find the details of your vesting schedule and who to ask for help.
• The implications of your vesting schedule regarding liquidity windows and taxes.