Vesting

Vesting is a term used where an entity (person or company) can be granted rights to an asset, where the final ownership of that asset accumulates to that entity over time.

Startup companies often grant options or restricted stock units as equity compensation to employees. To ensure loyalty, retention, and avoid unnecessary dilution, these equity grants are typically subject to vesting. A vesting schedule is provided to explicitly state the number of options or stock units that vest on each date over time.

If an employee is granted options as equity, they may exercise any vested options at any time. (Tax consequences upon exercise may be significant.) If the options are not exercised within a certain period after the end of employment, the individual loses the right to purchase those shares. That period is generally 90 days, though some companies have extended this window to several years.

If an employee is granted restricted stock units as equity, the employee gets full ownership of those shares as they vest according to the vesting schedule.

Typical vesting periods are 3-5 years, and often include a 1-year vesting cliff.