Vesting
The Promise Of Something Doesn't Mean It's Actually Yours (yet)
Continuing the theme of last week’s article related to equity compensation, today we’re discussing a concept that may be unfamiliar: vesting.
In the context of compensation, vesting generally refers to the process by which something promised to you (usually some form of equity, i.e. stock) becomes yours.
I’ll use an example to explain the concept.
Say you’d been offered a compensation package including a salary, bonus, and some number of shares (RSUs, Options, etc.) annually.
In some cases, the shares that you’re “given” annually, may not actually be yours for some period of time after they’ve been “given” to you.
This is where “vesting” comes in.
If the shares aren’t yours right away, there should be some sort of “schedule” by which they become yours - this is the “vesting”.
As you may imagine, there are limitless possibilities for schedules, so be sure to make sure you understand the specifics of whatever schedule your shares actually vest on.
Some schedules vest the shares equally over years, months or even weeks.
Other schedules have what’s known as a “cliff”.
This is where none of the shares vest for some period of time, then some portion of the shares vest, then the remaining portion of the shares vest gradually over another period of time.
Another example will likely help clarify:
Say you’d been offered 120 shares of ABC company that vest monthly over 5 years with a 1-year cliff.
This means that for months 1-12 none of the shares would vest, but then at the beginning of month 13 (i.e. the start of year 2) you’d receive 1/5 of the shares (24), then each month over the next 48 months (4 years) you’d receive 2 shares a month (2/month = 24/year = 1/4 of the non-vested shares each of the remaining 4 years).
One final thing to watch out for - generally if you leave a company, any shares that haven’t vested will not continue vesting after you’ve left, so you essentially “lose” those shares.
Whatever the case - make sure you understand the vesting schedule if you’re offered equity compensation and plan accordingly so that you don’t make the mistake of planning on having compensation that you won’t get till some later time (if at all).