Vesting Stock: How It Works

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,036 reviews

Jump to Section

Need help with a legal contract?

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

Briana C.

60 projects on CC
View Profile

Kristen R.

40 projects on CC
View Profile

Ryenne S.

133 projects on CC
View Profile

Zachary J.

53 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

Alen A. on ContractsCounsel
View Alen
5.0 (8)
Member Since:
August 26, 2021

Alen A.

Free Consultation
Get Free Proposal
Los Angeles, CA
16 Yrs Experience
Licensed in CA
University of West Los Angeles

Alen is an attorney and licensed real estate broker with over 15 years of experience representing clients in real estate and business matters. Alen has extensive experience in business and real estate matters. The work includes lease/contract drafting & negotiations, real estate transactions, advising the purchase/sale of businesses, and other matters commonly confronting small businesses and individuals.

Garrett M. on ContractsCounsel
View Garrett
5.0 (5)
Member Since:
August 29, 2021

Garrett M.

Free Consultation
Get Free Proposal
Dexter, MO
7 Yrs Experience
Licensed in TX
University of Texas

Hello! I am a young attorney with four years' experience in real estate transactions, fund formation, and general corporate transactional work. I graduated in 2016 from the University of Texas - Austin and I am barred in Texas.

Billy Joe M. on ContractsCounsel
View Billy Joe
5.0 (2)
Member Since:
October 25, 2021

Billy Joe M.

Partner Attorney
Free Consultation
Get Free Proposal
Chicago, IL
14 Yrs Experience
Licensed in IL
University of Illinois at Urbana-Champaign

I graduated from the University of Illinois at Urbana-Champaign in 2006 with a degree in Political Science, Finance, and Economics. I stayed around Champaign for law school and graduated in 2009. I then worked at a big law firm in downtown Chicago. It was boring, so I quit in early 2011. I thought that I could not be happy practicing law - I was wrong. After I quit the traditional law firm life, I began representing my own clients. I realize now that I love helping normal people, small business owners, and non-profits address a variety of legal issues. I hope to hear from you.

Phocus L. on ContractsCounsel
View Phocus
5.0 (1)
Member Since:
September 16, 2021

Phocus L.

Free Consultation
Get Free Proposal
Phoenix, AZ, USA
12 Yrs Experience
Licensed in AZ, CA
Georgetown University Law Center

G'day, my name is Michele! I work with startups, entrepreneurs and small/medium-sized businesses across the country in a wide array of industries. I help them with all of their ongoing, daily legal needs. This includes entity formation, M&A, contract drafting and review, employment, asset sale & acquisition, and business sales or shareholder exits. I'm half-Australian, half-Italian, and I've lived the last 20+ years of my life in America. I've lived all over the USA, completing high school in the deep south, graduating cum laude from Washington University in St. Louis, and then cum laude from Georgetown University Law Center. After law school I worked for the Los Angeles office of Latham & Watkins, LLP. After four intense and rewarding years there, I left to become General Counsel and VP of an incredible, industry-changing start-up called Urban Mining Company (UMC) that manufactures rare earth permanent magnets. I now work for Phocus Law where I help run our practice focused on entrepreneurs, startups, and SMEs. I love what I do, and I'd love to be of help! My focus is on providing stress-free, enjoyable, and high-quality legal service to all of my clients. Being a good lawyer isn't enough: the client experience should also be great. But work isn't everything, and I love my free time. I've been an avid traveler since my parents put me on a plane to Italy at 9-months old. I'm also a music nut, and am still looking for that perfect client that will engage me to explain why Dark Side Of The Moon is the greatest album of all time. Having grown up in a remote, and gorgeous corner of Australia, I feel a strong connection to nature, and love being in the elements.

Daliah S. on ContractsCounsel
View Daliah
Member Since:
September 1, 2021

Daliah S.

Principal Attorney
Free Consultation
Get Free Proposal
Chicago, IL
19 Yrs Experience
Licensed in IL
University of Illinois College of Law

Daliah Saper operates a cutting-edge internet and social media law practice that regularly leads local and national media outlets to solicit her commentary on emerging internet law issues involving cyberbullying, sexting, catfishing, revenge porn, anonymous online defamation, domain name and user-name squatting, privacy, and the latest business decisions made by social media platforms such as Facebook, Twitter and YouTube. As a litigator Daliah represents companies bringing or defending business and intellectual property disputes. (She has argued cases in a number of jurisdictions including taking a case all the way to the Illinois Supreme Court.) As a transactional lawyer she helps clients choose the right business entity, drafts contracts and licensing agreements, advises on sweepstakes and contest rules, and ensures website terms of use and privacy policies are compliant, and provides comprehensive trademark and copyright counseling. Since founding Saper Law Offices in 2005, Daliah has been named a 40 Under 40 by Law Bulletin Publishing Co., a top Media & Advertising attorney by Super Lawyers Magazine 14 years in a row, and has been repeatedly recognized as a leading media and entertainment lawyer by Chambers and Partners. For the past eleven years, she also has taught entertainment and social media law at Loyola University Chicago School of Law.

Alex M. on ContractsCounsel
View Alex
Member Since:
August 26, 2021

Alex M.

Free Consultation
Get Free Proposal
Los Angeles, California
12 Yrs Experience
Licensed in CA
Southwestern Law School

Mr. Mehdipour attended the University of California San Diego where he received his degree in political science. After graduating from UCSD, Mr. Mehdipour attended Southwestern University School of Law where he received his JD. Upon passing the bar, Mr. Mehdipour gained invaluable experience both in a law firm and business setting. Mr. Mehdipour uses his prior business and legal experiences to negotiate the most advantageous results for his clients.

Nicholas A. on ContractsCounsel
View Nicholas
Member Since:
August 28, 2021

Nicholas A.

Founder, Victrix Legal LLC
Free Consultation
Get Free Proposal
Buffalo, NY
2 Yrs Experience
Licensed in NY
Liberty University School of Law

I help small business owners build and protect their dreams. I always thought that I would just be a litigator. Then I joined an intellectual property clinic in law school. We were helping nonprofits and small businesses reach their goals. I fell in love with the work and decided to open my own firm so I could keep helping them. When I decided to start Victrix Legal, I decided that it would be a modern law firm designed to serve professionals. It would be different from every other law firm. In my experience, my law firms are designed to promote inefficiency and reactionary lawyering. Because in most firms, you make more money when you spend more time on a project. And you lose money if your client doesn't get sued. In my opinion, that's a built-in conflict of interest. My firm is different. I use flat fees for most basic projects to keep costs predictable for you and incentivize efficiency. I offer long-term advisory plans and legal audits to prevent issues from happening. I want my clients to see me as their business partner, not just the guy they call when they are in trouble. If any of that interests you, please reach out to me. I offer free consultations. Let's set aside some time and talk about what your legal needs are.

Gerald W. on ContractsCounsel
View Gerald
Member Since:
August 28, 2021

Gerald W.

Free Consultation
Get Free Proposal
Round Rock, Texas
9 Yrs Experience
Licensed in IL, TX
Valparaiso University School of Law

My clients know me as more than just an attorney. First and foremost, my background is much broader than that. Prior to attending the Valparaiso University School of Law, I earned a Master of Business Administration and ran a small business as a certified public accountant. Thanks to this experience, I possess unique insight which in turn allows me to better assist my clients with a wide range of business and tax matters today. In total, I have over 20 years of experience in financial management, tax law, and business consulting, and I’m proud to say that I’m utilizing the knowledge I’ve gained to assist the community of Round Rock in a variety of ways. In my current practice, I provide counsel to small to medium-sized businesses, nonprofit organizations, and everyday individuals. Though my primary areas of practice are estate planning, elder law, business consulting, and tax planning, I pride myself on assisting my clients in a comprehensive manner. Whenever I take on a new client, I make an effort to get to know them on a personal level. This, of course, begins with listening. It is important that I fully understand their vision so I can help them successfully translate it into a concrete plan of action that meets their goals and expectations. I appreciate the individual attributes of each client and know firsthand that thoughtful, creative, and customized planning can maximize both financial security and personal happiness. During my time as a certified public accountant, I cultivated an invaluable skill set. After all, while my legal education has given me a deep understanding of tax law, I would not be the tax attorney I am today without my background in accounting. Due to my far-reaching experience, I am competent in unraveling even the most complex tax mysteries and disputes. My CPA training benefits my estate planning practice, too. In the process of drafting comprehensive wills and trusts, I carefully account for every asset and plan for any tax burdens that may arise, often facilitating a much smoother inheritance for the heirs of my clients. Prior to becoming certified as a CPA, I made sure to establish a solid foundation in business both in and out of the classroom, and the acumen I’ve attained has served me well. Not only am I better able to run my own practice than I otherwise would be; I am able to help other small business owners fulfill their dreams, as well.

James David W. on ContractsCounsel
View James David
Member Since:
September 3, 2021

James David W.

Free Consultation
Get Free Proposal
Raleigh, NC
7 Yrs Experience
Licensed in DC, NC
Harvard Law School

I graduated from Harvard Law School and worked first for a federal judge and then a leading DC firm before starting a firm with a law school classmate. My practice focuses on company formations, early-stage investments, and mergers & acquisitions.

Anna K. on ContractsCounsel
View Anna
Member Since:
November 11, 2021

Anna K.

Free Consultation
Get Free Proposal
Miami, Florida
25 Yrs Experience
Licensed in FL
University of Miami

Anna is an experienced attorney, with over twenty years of experience. With no geographical boundaries confining her practice, Anna works on corporate, healthcare and real estate transactions. Anna brings extensive big firm experience, garnered as an associate in the Miami office of the world's largest law firm, Baker and McKenzie, and the Miami office of the international law firm Kilpatrick Townsend. Her areas of expertise include: mergers and acquisitions, initial public offerings, private placements, healthcare transactions, corporate finance, commercial real estate transaction and acting as a general corporate counsel. Anna is certified to practice law in Florida and was admitted to the Florida Bar in 1998. Anna is also a Certified Public Accountant. She passed May 1995 CPA Exam on the first sitting. She is fluent in Russian (native).

Serge Y. on ContractsCounsel
View Serge
Member Since:
September 22, 2021

Serge Y.

General Counsel
Free Consultation
Get Free Proposal
11 Yrs Experience
Licensed in NY
Fordham University School of Law

Startup Lawyer that caters to the entrepreneurial spirit. Focusing on building long term relationships and working with emerging startups throughout their entire life cycle. From concept to IPO, I'll will help guide you along the way. Years of high level experience drafting, negotiating, and reviewing all types of transactional contracts, e.g., operating agreements, charters, bylaws, NDAs, Terms of Service, Master Service Agreements, etc. You name it; it's crossed my desk. Have a depth of experience working with the USPTO to file trademarks, copyrights, and patents. If you're in the startup space and need a helping hand, I'm your guy.

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