Vesting Stock:
How It Works

Jump to Section

Need help with a legal contract?

CREATE A FREE PROJECT POSTING
Post Project Now

What Is Vesting Stock?

In employee compensation, vesting stock refers to shares held by an employee that were granted either through employee stock options (ESOs) or restricted stock units (RSUs), that is not yet earned by the employee. Vesting is a legal term that means the point in time where property is earned or gained by some person.

In practical terms, many employers grant stock options or restricted stock as part of their compensation plans that are accompanied with vesting schedules, which means the employee needs to hit certain achievements in order to gain the right to own the shares.

  • Employee Stock Options (ESOs) : For ESOs, when stock becomes fully vested, the employee has earned the right to an option to purchase the shares that were granted to them in the past.
  • Restricted Stock Units (RSUs) : For RSUs, when stock becomes fully vested, the employee has earned the ownership of the shares outright.

Here is an article on employee stock purchase plans.

Vesting Stock Explained

For stock options, like incentive stock options or non-qualified stock options , an employee earns the right to purchase shares at a preset price in the future. In order to earn this right, they need to let the stock options vest.

For restricted stock units , an employee takes ownership of the stock once it becomes fully vested. Before stock is fully vested, it is considered vesting stock .

Vesting is commonly tied to time, but can also be tied to certain milestones. For example, vesting stock may become fully vested after four years, with shares becoming incrementally vested on shorter timeframes. Vesting stock can also become fully vested when an employee completes certain tasks or hits certain milestones.

Before stocks are fully vested, an employee does not have the right to purchase them or own them.

Types of Vesting

Vesting is a common way for employers to incentivize employees to achieve certain milestones that help their business before issuing the employee stock. There are three main types of vesting.

Time-based Vesting

Time-based vesting is exactly what it sounds like. In order for an employee to gain the right to the stock, they will need to stay at the employer for a certain amount of time.

It is common to see a four-year vesting schedule tied to stock options with a one-year cliff. This simply means an employee needs to stay for a minimum of one year to earn any shares, and will have fully vested shares after four years of service.

Milestone-based Vesting:

Milestone-based vesting is not tied to time, but rather a value-creating task completed by an employee that would trigger the shares to vest.

One example of this may be a software developer completing a version one of a software product for their options to vest. There are many other examples of how this can be set up, and some think it is a better way of setting up vesting stock since it isn’t tied to an arbitrary metrics like time.

Hybrid Vesting:

Hybrid vesting is simply a mix of the two. An employee will need to spend a certain amount of time at an employer AND complete certain value-creating tasks in order to earn the right to the shares.

Here is an article on the different types of vesting.

Meet some lawyers on our platform

Jaren J.

1 project on CC
View Profile

Paul S.

5 projects on CC
View Profile

Michael B.

2 projects on CC
View Profile

Briana C.

5 projects on CC
View Profile

What Is A Vesting Schedule?

A vesting schedule is the term in the stock-based grant that outlines when the stock will be considered vested and the employee earns the right to purchase or own the stock. For example, if you receive stock options with a vesting schedule of four years, after the four years you will have earned the right to purchase all of the options shares at the pre-set exercise price.

What’s a typical vesting schedule?

An example of a typical vesting schedule is time-based for four-years with a one-year cliff where 1/4 of the shares vest after one year. After the one year, 1/36 of the remaining options shares will incrementally vest each month.

For example, if you have been granted 1,000 option shares with the above vesting schedule, and end up staying for 1.5 years, 375 option shares would have vested.

  • One-year = 250 shares
  • One-half year = 125 shares
  • 250 shares + 125 shares = 375 shares

Here is an article on how vesting schedules work.

ContractsCounsel Vesting Image

Image via Pexels by Tima

Vesting Stock Example

Let’s go over a real-life example to better understand vesting stock. Below awe will outline a fairly normal employee stock option situation so you can better understand vesting.

Vesting Terms of the Employee Stock Options

  • Grant Date: January 1, 2020
  • Number of Shares: 10,000
  • Vesting Schedule:
    • Four-year vesting schedule
    • One-year cliff
    • 1/36 of the remaining shares vest monthly thereafter

Vesting Stock Scenarios

  • Employee leaves after 6 months
    • In this scenario, if an employee leaves after six months of service, zero shares would have vested.
    • This is because of the ‘one-year cliff’. Essentially, if the employee does not stay a minimum of one year, then they are not entitled to any of the option shares.
  • Employee leaves one year
    • In this scenario, the employee would have earned 2,500 shares.
    • This is because one year is 25% of the vesting schedule, thus earnings 25% of the option shares.
  • Employee leaves after 30 months
    • In this situation, 6,250 shares would have vested.
    • This is because the employee would have earned 2,500 shares after year one, which leaves 7,500 remaining shares. The employee stays for another 18 months out of the remaining 36 months, which means they would have earned 1/2 (18/36 = 1/2) of the 7,500 shares, or 3,750 shares.
    • 2,500 + 3,750 = 6,250 shares vested.
  • Employee stays forever
    • In this situation, the employee would have had the full 10,000 shares vest.

Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Vesting and Stock Options

Stock options are different than restricted stock, in the sense the employees earn the right to purchase the shares are a pre-set price, or exercise price. In order for the employee to exercise their options, the stock options will have need to vested.

Vesting schedules are set up as part of the legal agreement for employee stock options. Once stock is vested, the employee has earned the right to exercise the options.

Here is an article on employee stock options.

Getting Help Understanding Vesting

Vesting stock can be a difficult topic to understand. If you have any questions about vesting or want a lawyer to review your stock options agreement, feel free to post a project in ContractsCounsel’s marketplace to get free bids from lawyers on our platform.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

ContractsCounsel verified
Attorney
9 years practicing
Free Consultation

Experienced Attorney focused on transactional law, payments processing, banking and finance law, and working with fintech companies with a demonstrated history of driving successful negotiations in technology sourcing and transactions and strong understanding of government contracts and the procurement process

ContractsCounsel verified
Attorney
13 years practicing
Free Consultation

Seasoned negotiator, mediator, and attorney providing premier legal advice, services, and representation with backgrounds in education, healthcare, and the restaurant and manufacturing industries

ContractsCounsel verified
Managing Partner
10 years practicing
Free Consultation

I am an experienced technology contracts counsel that has worked with companies that are one-person startups, publicly-traded international corporations, and every size in between. I believe legal counsel should act as a seatbelt and an airbag, not a brake pedal!

ContractsCounsel verified
Attorney
8 years practicing
Free Consultation

Attorney (FL, LA, MD) | Commercial Real Estate Attorney and previous Closing Manager (Driving Growth from $10M to $50M+/month).

ContractsCounsel verified
Attorney-at-Law
10 years practicing
Free Consultation

John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.

ContractsCounsel verified
Partner
8 years practicing
Free Consultation

Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.

ContractsCounsel verified
Attorney
11 years practicing
Free Consultation

Michael has extensive experience advising companies from start-ups to established publicly-traded companies . He has represented businesses in a wide array of fields IT consulting, software solutions, web design/ development, financial services, SaaS, data storage, and others. Areas of expertise include contract drafting and negotiation, terms of use, business structuring and funding, company and employee policies, general transactional issues as well as licensing and regulatory compliance. His prior experience before entering private practice includes negotiating sales contracts for a Fortune 500 healthcare company, as well as regulatory compliance contracts for a publicly traded dental manufacturer. Mr. Brennan firmly believes that every business deserves a lawyer that is both responsive and dependable, and he strives to provide that type of service to every client.

ContractsCounsel verified
Attorney
7 years practicing
Free Consultation

Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.

ContractsCounsel verified
Managing Attorney
14 years practicing
Free Consultation

George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.

ContractsCounsel verified
Founding Partner
24 years practicing
Free Consultation

My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.

ContractsCounsel verified
Attorney
2 years practicing
Free Consultation

Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call