What is Stock Option Vesting? And How it Affects Your Future Related to Company Shares?

Employers provide employees with stock options because they want them to stay for a long period and put in their best efforts for the company’s growth. This is why companies created a process where the employees must earn the right to purchase the shares over a specific period of time. This period is called a vesting schedule.

Explaining in other terms, a stock is considered to be vested when the employee is allowed to exercise their stock option and purchase the shares.

Different Types of Stock Option Vesting Schedules

Different companies have different policies for vesting schedules which are defined on the stock option agreement.

Some companies provide quick and full vesting to new employees, as part of a sign-on bonus to bring them on board. However, in most cases the stocks are not fully vested on day 1 as the companies do not want to employees to purchase the shares and leave the company immediately. Sometimes, companies create a performance based vesting schedule, which means they are allowed to exercise the options once they achieve certain performance related goals.

Typical Stock Option Vesting

The majority of the stock options (whether ISOs or NSOs) typically have a year-based vesting plan that includes a certain percentage of options vesting each year. For example, 25 percent of the options will vest after one year and the remaining 75 percent vest over the next 3 years.

If the employee decides to leave the company mid-way they are entitled to get the vested portion of the stocks up to that time. Similar is the case with retirement, disability or death conditions when the employee stops being a part of the company. Stock option vesting is a key concept and must be thoroughly understood by the employees before proceeding with the option agreement.

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