What is a vesting scheme?

The vesting scheme or vesting schedule determines when your employee equity vests.

Vesting is jargon for you actually ‘getting’ your employee equity (such as stock options or RSUs). If you have a time-based vesting schedule and you leave your company before it hits the required time at the company, it is not vested and you won’t get to keep it.

Note that if you have stock options, vesting is not the same as exercising. To get the full picture of how stock options work, read our Stock Option Starter Guide.

How do I know my vesting scheme?

You can find your vesting scheme in your offer letter or option grant documents.

The most common vesting scheme: 4 years with a 1-year cliff

In the most common scheme for stock options, vesting is purely time-based. As you keep working for the company, your options vest monthly over the course of 4 years with a one-year cliff.

That means the following:

One-year cliff: during the first year, nothing vests. After the first year, 25% of your stock options instantly vest.
Monthly vesting over 4 years: after the cliff, your options vest such that 100% is vested after your fourth year of employment. As they vest monthly, 1/48th of your total number of granted options vest each month.

How do vesting schemes work for RSUs?

Compared to stock options, the story for RSUs is somewhat different. RSU vesting schemes are commonly tied to both a time trigger and an exit trigger. This means that even when you work for the company long enough for several years, your RSUs will still not vest until there is an IPO or acquisition. This is meant to protect you from being hit with a tax bill on shares received that they cannot yet sell.

Why do companies set vesting schemes?

Companies enact vesting schemes primarily to ensure that employees only get to keep equity if they keep working there for some time and meet hiring expectations. Otherwise, an employee can take a job, grab the equity or options, and quit the next day. As employee equity is meant to attract and retain talent, that would not be a great outcome for the employer.

Hope that was helpful

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