{"id":1427,"date":"2019-07-11T00:00:00","date_gmt":"2019-07-11T00:00:00","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/blog\/what-is-stock-vesting\/"},"modified":"2021-03-05T06:57:40","modified_gmt":"2021-03-05T06:57:40","slug":"what-is-stock-vesting","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/what-is-stock-vesting\/","title":{"rendered":"What is vesting?"},"content":{"rendered":"\n

When a company gives you equity<\/a> as part of your compensation package<\/a>, they\u2019re offering you partial ownership of the company. However, your stock usually has to vest first, meaning you typically need to work for the company for a period of time if you want to become an owner.<\/p>\n\n\n\n

Vesting is the process of earning an asset, like stock options or employer-matched contributions to your 401(k) over time. Companies often use vesting to encourage you to stay longer at the company and\/or perform well so you can earn the award.<\/p>\n\n\n\n

Stock vesting explained<\/h2>\n\n\n\n

With stock options, like ISOs<\/a> or NSOs<\/a>, you aren\u2019t getting actual shares of stock\u2014yet. Instead, you\u2019re getting the right to exercise<\/a> (buy) a set number of shares at a fixed price later on. You usually have to earn your options over time\u2014a process called vesting. And you can only exercise vested stock options (unless your company allows early exercising).<\/p>\n\n\n\n

If your company gives you RSUs, on the other hand, they\u2019re giving you stock in the future. You may have to stay at the company for a certain amount of time, and sometimes you or the company must hit a stated milestone in order for these shares to vest. But unlike stock options, you don\u2019t need to purchase them\u2014you just need to wait for them to vest.<\/p>\n\n\n\n

Your vesting schedule, which shows when you\u2019ll earn your options or shares, should be detailed in your option grant (e.g. 1,000 options over four years).<\/p>\n\n\n\n

<\/a><\/p>\n\n\n\n

There are three common types of vesting schedules: time-based, milestone-based, and a hybrid of time-based and milestone-based.<\/p>\n\n\n\n

Time-based vesting and one-year cliffs<\/h3>\n\n\n\n

With time-based stock vesting, you earn options or shares over time.<\/p>\n\n\n\n

Most time-based vesting schedules have a vesting cliff. A cliff is when the first portion of your option grant vests. After the cliff, you usually gradually vest the remaining options each month or quarter.<\/p>\n\n\n\n

Many companies offer option grants with a one-year cliff. This means you must stay at the company for at least a year if you want to exercise any options. Any unvested options get put back into the option pool when you leave (and after the post-termination exercise period<\/a> has elapsed).<\/p>\n\n\n\n

\"how<\/figure><\/div>\n\n\n\n

Under a standard four-year time-based vesting schedule with a one-year cliff, 1\/4 of your shares vest after one year. After the cliff, 1\/36 of the remaining granted shares (or 1\/48 of the original grant) vest each month until the four-year vesting period is over. After four years, you are fully vested.<\/p>\n\n\n\n

Keep in mind that each option grant has its own vesting schedule\u2014vesting isn\u2019t based on your overall tenure at the company. If you got one grant in 2020 with a four-year vesting schedule and another grant from the same company in 2022 with a four-year vesting schedule, you wouldn\u2019t vest all of the options in both grants until 2026.<\/p>\n\n\n\n

Milestone-based vesting\u00a0<\/h3>\n\n\n\n

With milestone vesting, you get your options or shares after completing a specific project or when you and\/or the company reach a business goal (e.g. the company hits a certain valuation). This type of vesting isn\u2019t as common as time-based vesting.<\/p>\n\n\n\n

Hybrid vesting<\/h3>\n\n\n\n

Hybrid vesting is a combination of time-based and milestone vesting. With hybrid vesting, you have to both work at the company for a certain amount of time and<\/em> hit one or more milestones to receive your options or shares.<\/p>\n\n\n\n

Stock vesting example<\/h2>\n\n\n\n

Meetly, Inc. hired Sadie on November 1st, 2017. As part of her compensation package, Meetly gave Sadie an option grant with the following details:<\/p>\n\n\n\n