Vesting

What it means

Vesting is a rule that keeps your stock awards safe until you have worked at your company for a set amount of time. It is like earning a paycheck, but instead of cash, you are earning ownership in the business.

Most plans require you to stay for a few years to get all your shares. If you leave your job before the shares finish vesting, you generally lose the shares that you have not earned yet.

A simple example

Imagine Sarah gets 4,000 Restricted Stock Units (RSU—a promise of company stock). Her plan has a four-year schedule with a one-year cliff. This means she earns nothing until she reaches her one-year anniversary. On that day, she earns 1,000 shares (the cliff). Then, she earns the remaining 3,000 shares bit by bit over the next three years. If she quits after ten months, she gets zero shares.

Why it matters to you

• Your unvested shares are not truly yours yet; you could lose them if you leave your job.
• When shares vest, they often count as taxable income, which may lead to tax bills.
• Knowing your schedule helps you plan when you might have extra money or when you might owe taxes.
• A tax professional can help if you are worried about your specific tax bill.

Common mistakes to avoid

• Assuming you own all your granted shares immediately; you must wait for them to vest.
• Quitting your job before a "cliff" date, which results in losing all the shares that were about to vest.
• Forgetting to set aside money for taxes when your shares vest and become your property.

Words used on this page

• Restricted Stock Unit (RSU): A promise from your company to give you one share of stock once you meet certain conditions.
• Vesting: The process of gaining ownership of your stock awards over time.
• Cliff: A waiting period where you earn zero shares until you reach a specific milestone date.
• Taxable Income: The amount of money you earn that the government requires you to pay taxes on.