Introduction
Vesting is a process that determines when you gain full ownership rights to your equity compensation. When you receive a stock option grant or equity award, you don't typically own all of it immediately. Instead, you earn the right to your equity over time as you continue working for the company.
This article explains how vesting works, the key terms you need to understand, and what vesting means for your equity compensation.
What is vesting?
Vesting is the process through which you earn the right to employer-provided equity over time. Vesting schedules determine how long you need to remain with the company to earn the full amount of your granted stock options or shares.
Key concept: Vesting creates a timeline for when you gain ownership of your equity. The company grants you options or shares, but you only earn the right to exercise or own them according to the vesting schedule.
Why companies use vesting: Vesting helps companies retain talent by providing an incentive for employees to stay with the company over time. It aligns employee interests with long-term company success.
How vesting schedules work
When you receive an equity grant, the vesting schedule defines three important elements:
How long it takes to vest completely (vesting duration)
How often portions vest (vesting interval)
The minimum time before any equity vests (cliff period)
Your unvested equity remains with the company if you leave before it vests. Only the vested portion of your grant is yours to keep when you leave the company.
Key vesting terms explained
Vesting duration
The vesting duration is the total length of time it takes for your entire equity grant to vest completely.
Common vesting durations:
4 years is the most common vesting duration
Some companies use 3-year or 5-year schedules
Executive grants may have longer vesting periods
Example: If you receive 1,000 stock options with a 4-year vesting duration on January 10, 2022, your options will be fully vested by January 10, 2026.
Vesting interval
The vesting interval determines how frequently portions of your grant vest. This defines whether your equity vests continuously or in batches.
Common vesting intervals:
Monthly vesting - Your grant vests in equal portions every month (most common)
Quarterly vesting - Your grant vests every three months
Annual vesting - Your grant vests once per year
Other intervals - Some companies use 6-month or custom intervals
Example: If you have 1,200 stock options vesting over 4 years with monthly vesting, you would vest 25 options per month (1,200 ÷ 48 months = 25 per month).
Important note about Ledgy: Ledgy doesn't support fractional shares, so vesting amounts are always rounded to whole numbers.
Cliff period
A cliff is the minimum period of time you must work at the company before any of your equity vests. The cliff acts as a probationary period before you earn any ownership rights.
How cliffs work:
No equity vests during the cliff period
At the end of the cliff, a batch of equity vests all at once
After the cliff, equity typically vests according to the regular interval
Common cliff periods:
1-year cliff is the most standard (especially for 4-year vesting schedules)
Some companies use 3-month, 6-month, or no cliff at all
Executive or advisor grants may have different cliff structures
Example: You receive 1,000 stock options with a 4-year vesting schedule, monthly vesting, and a 1-year cliff. Here's what happens:
Months 1-12: No options vest during the cliff period
At 12 months: 250 options vest at once (25% of 1,000 options)
Months 13-48: Approximately 21 options vest each month (remaining 750 options ÷ 36 months)
The following example illustrates a straightforward time-based vesting schedule: 48 months total duration, with a 6-month cliff and monthly vesting:
Types of vesting
Time-based vesting
Time-based vesting is the most common type of vesting schedule. Your equity vests automatically based on the passage of time as long as you remain employed by the company.
Characteristics of time-based vesting:
Vests according to a fixed schedule (duration, interval, and cliff)
Does not depend on company or individual performance
Continues automatically if you remain employed
Standard for employee stock option plans
Important: Every company's equity plan can have different terms. Always check with your employer if the specific rules of your vesting schedule are unclear.
Performance-based vesting
Performance-based vesting ties your equity to achieving specific goals or metrics rather than just time served. Your equity only vests when predetermined performance conditions are met.
Common performance conditions:
Company revenue or profit targets
Individual Key Performance Indicators (KPIs)
Product launch milestones
Strategic goals or company valuations
Why companies use performance-based vesting:
Incentivizes employees to achieve specific objectives
Aligns equity compensation with company success
Not linked to seniority or tenure alone
Hybrid schedules: Some grants combine both time-based and performance-based vesting, requiring you to meet both tenure and performance requirements.
What happens to unvested shares?
Your unvested equity is not yet yours to keep. Here's what typically happens in different situations:
If you leave the company voluntarily
If you resign or leave the company before your equity fully vests, you typically forfeit all unvested portions. You can only keep or exercise the equity that has already vested before your departure date.
If you are terminated
Standard vesting schedules usually stop immediately upon termination. You keep your vested equity but forfeit unvested portions. However, termination terms can vary by country, employment contract, and specific equity plan.
If the company is acquired
Acquisition scenarios vary widely and depend on your equity agreement:
Accelerated vesting - Some agreements include provisions that speed up vesting
Assumption - The acquiring company may assume your vesting schedule
Cash-out - Sometimes unvested equity is cancelled with compensation
Always review your equity documents or consult your employer to understand what happens to your unvested equity in different scenarios.
Frequently Asked Questions
When do my stock options start vesting?
Your stock options typically start vesting on your grant date (the date specified in your equity grant agreement). If your vesting schedule includes a cliff, no options will vest until the cliff period ends, but the vesting period still begins on your grant date.
Can I exercise unvested stock options?
No, you cannot exercise unvested stock options. You can only exercise options that have already vested. Once options vest, you have the right to exercise them according to your equity plan terms.
What happens to my vested options if I leave the company?
When you leave the company, you typically have a limited time window (often 90 days, but this varies) to exercise your vested stock options. If you don't exercise them within this period, you may forfeit them. Check your equity agreement for your specific exercise window.
How can I see my vesting schedule in Ledgy?
You can view your complete vesting schedule in your Ledgy stakeholder dashboard. Your portfolio page shows your total granted equity, how much has vested, how much remains unvested, and your upcoming vesting dates.
What is accelerated vesting?
Accelerated vesting is when your equity vests faster than the original schedule. This can happen in specific situations like a company acquisition, termination without cause, or if your equity agreement includes acceleration clauses. Acceleration terms vary by agreement.
Can my company change my vesting schedule?
Generally, companies cannot change the vesting schedule for equity that has already been granted to you without your consent. However, future grants can have different terms. Any changes to existing grants should be documented in writing and agreed upon by both parties.