Introduction
Vesting is a term that defines how and when grant recipients will have shares or options made available to them for purchase. This article explains basic terms of vesting schedules, and the types of schedules available for use when issuing new grants. See this blog post for more general information about vesting.
Types of Vesting
Grants can be issued with different types of vesting, although the most common type of vesting is typically time-based vesting. When running the Grant Shares or Options workflow, you will always have the option of selecting one of three types of vesting for option or share grants:
- Time-based vesting
- Milestone/Variable vesting
- No vesting
Time-based vesting simply means that a grant is subject to vesting according to a set schedule, such as every month or every year. The grant relies on time to determine how many shares have vested at a particular moment. The system will perform these calculations for you based on your input during the Grant Shares workflow and can be found when viewing grant details, or from the My Equity page.
Milestone/Variable vesting (also known as custom-based vesting) is a form of vesting that does not rely solely on time. This option can be used for an irregular time-based schedule that cannot be captured as monthly, quarterly, annual vesting (for example, vesting that occurs every six months), or a time-based schedule that will only start once a condition has been met.
Milestones could be when certain targets or goals have been met, or when certain events have happened. For example, a grant may have milestone vesting if an employee meets a sales goal, or a milestone when the company releases a new product. Because these milestones are not on a set schedule, they need to be manually captured. See this article for more information on setting up and using milestone and variable time-based vesting schedules.
No vesting means that the shares are fully vested upon issuance.
Vesting Terminology
Vesting is a restriction that is typically attached to stock option grants, restricted stock awards, and founder's shares. This restriction prevents the grantee from obtaining the full number of shares right away and instead must meet the vesting restrictions before the shares are owned or are available for purchase.
While the types and details of a vesting schedule can vary greatly, there are several terms that are used for most schedules. Below is an example of the grant details and vesting schedule from an employee stock option grant.
In addition to details like the grant date, number of shares, and the exercise price, the grant document explains how the shares become available or purchase, or vested, over time. In this example, the grant starts with no shares vested. After the grantee works for the company for one year, 25% of the shares will vest, and then the grant will continue to vest each month in equal amounts for the next three years until the grant is fully vested.
Below are some additional terms related to vesting:
- Grant date: This is the date the grant was signed/executed and issued to you.
- Vesting Commencement Date: The date on which the vesting schedule starts. Note that the Grant Date and Vesting Commencement Date sometimes will not match.
- Total vesting period: The length of time the grant will vest. By the end of this period, all of the grantee's shares will be vested, or available for purchase. This period typically lasts several years.
- Vesting cliff: An employee’s shares do not vest until the cliff ends, at which point all of the shares that should have been vested during this time become vested at once. Typically, the cliff length is a year. The cliff encourages new employees to stay at a company for more than a year; if they leave the company before the cliff has been met, they walk away with no vested shares.
- Vesting frequency: This is how frequently your shares vest, typically monthly, quarterly, or annually.
- Acceleration: Some grants may include terms for accelerated vesting. If shares are subject to acceleration, then, under certain conditions (called triggers), all or some of the unvested shares will immediately accelerate and become vested once the necessary triggers have been satisfied.
- Vesting event, vesting period, or tranche: The event or date when shares vest, such as each month on a monthly vesting schedule.
Frequently Asked Questions
How do I pause or freeze vesting?
It is unusual to pause or freeze vesting and we recommend speaking to your lawyer before you pause or freeze vesting. If you need documentation to memorialize this arrangement, you should contact your lawyer to draw up these documents. If you and your lawyer decide freezing or pausing your vesting is necessary, please reach out to our Support team for more information on how to properly reflect this vesting in your cap table.
How do I make changes to a grant's vesting schedule?
The Amend Grant or Add Vesting workflow can be run to make changes to a grant and/or the vesting schedule. This workflow will allow you to upload evidence of the change (your lawyer will want to draft something for you to upload as the system will not generate this documentation). During the workflow, you will be able to edit the following details:
- Type of vesting
- Number of shares granted
- Per share price (if applicable, read more about this optionality here)
- Expiration date
- Vesting commencement date
- Number of shares subject to vesting
You will be asked to upload Board Approval for these changes.
What happens to my vested shares if I leave the company?
Typically, upon a termination, any unvested shares return to the company, and you will have a set amount of time to exercise any vested shares before they are forfeited. This time frame will vary based on the type of termination and the details specified in your company's Stock Incentive Plan. See this article for more information about your stock options.
Fidelity does not provide legal or tax advice.
Screenshots are for illustrative purposes only.
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