The Basics of Equity Compensation

Vested Options

A stock option grant may need to vest before it can be exercised.

If vesting is a feature of a stock option plan, that means the options cannot be exercised until certain requirements are fulfilled. These requirements vary according to company procedure and typically call for an employee to be with the company for a specified amount of time, the options being termed “time-vested” or “tenure based.”

Employers want to retain talent; vesting is just another incentive to get employees to stick around.

Vesting schedules can vary:

• from company to company
• within a single company
• for different stock option grants
• for different levels of employees with the same option grant
• for NSOs and ISOs

How long is a vesting period?

Generally, stock options are not vested at the time they are granted. They usually vest according to a cliff, graded, or hybrid (e.g., combined cliff and graded design elements) schedule over several years. Options often vest completely in three to five years.

Examples

Elizabeth was granted 1,600 options in October of 2024. Let's take a look at the schedule under each type of vesting:

Graded Schedule: Stock option partially distributed throughout years.

Cliff Schedule: All options vest after a specific number of years.

Hybrid Schedule: Options begin vesting after a specific number of years.

Exercise Once options are vested, should they be exercised immediately? Well, it depends. But it's probably best to hold off on exercising and selling due to the potential to earn money without having to pay taxes (until you exercise, of course).

Expiration. What are an employee's rights once an option expires? Unfortunately, there are none. Your right to exercise disappears.