Employee stock options vesting. Exercising your options will make you a shareholder and provide you with an investment vehicle with growth potential. While you're not obligated to exercise an option, if you choose to acquire the stock, here are a few guidelines to follow. Vesting Vesting is the period over which an employee has the ability to realize rights.

Employee stock options vesting

Vesting (Options)

Employee stock options vesting. ABC, Inc., hires employee John Smith. As part of his employment package, ABC grants John options to acquire 40, shares of ABC's common stock at 25 cents per share (the fair market value of a share of ABC common stock at the time of grant). The options are subject to a four-year vesting with one year.

Employee stock options vesting

See how Wealthfront can help you reach your financial goals. Before we analyze what vesting schedule is appropriate and how it can affect you, we need to provide a little background on why vesting came to be associated with stock options and RSUs. Vesting refers to the process by which an employee earns her shares over time. The most common form of vesting in Silicon Valley is monthly over four years with a one-year cliff. The one-year cliff was created to protect companies against issuing stock to bad hires, which typically are not recognized at least until at least a few months into their tenure.

Vesting should not be confused with time to exercise. Many founders I talk to get annoyed when the subject of vesting comes up. They find it quite offensive that they are required to vest their stock when they accept venture capital. In their minds the question is: By accepting vesting on your shares, you have the moral high ground to insist on vesting of the people you hire, thereby protecting the company from a potentially bad hire.

Unvested shares can be put back into the pool and used to hire a replacement. Based on the argument raised above it should come as little surprise that founders typically get preferential vesting relative to regular employees. In my experience they usually forego the one-year cliff and get vesting credit from the time they started thinking about their idea.

Their unvested shares then might get vested over three or four years. For example, if a founder has worked on her idea for a year and a half before venture financing, she might get As I said before, non-founder employees typically vest their stock over four years. In some instances on the east coast I have seen companies require their employees to vest over five years, but I have never seen less than four years. Companies backed by buyout firms, who are not used to broadly sharing equity with employees, often require the strangest and most unfair vesting.

Skype, which was acquired by Silver Lake Partners, took a lot of heat in because there was a clause buried in their option agreement that required employees to be employed by the company at the time of a liquidation event sale or IPO to qualify for their vesting.

In other words employees who left after one and a half years into their four-year vesting got nothing when the company was acquired by Microsoft because they were no longer employees at the time the deal closed. You are supposed to get your share of the acquisition proceeds whether you are there at the time of the deal or not. Unfortunately Skype employees who left after their one year cliff thought they had vested their stock because that is the norm. The more non-standard the vesting the harder it usually is for a company to recruit outstanding people.

Why should someone agree to five-year vesting if they can get four-year vesting across the street? Unfortunately some founders look at vesting through the lens of their desire to lockup employees and minimize their personal dilution and fail to see the unattractive and unfair nature inherent in the packages they offer. Some companies offer vesting acceleration to employees in the event of an acquisition. By that I mean the employee might earn an extra six or 12 months of vesting at the close of the deal.

For example, if you were two and a half years vested at the time of an acquisition and your company offered six months acceleration then you would have earned three quarters of your equity 2.

I should point out that acceleration upon merger is typically only offered with what is known as a double trigger. This phrase means that two events are required to trigger the acceleration: The reason executives are able to command the acceleration benefit because ironically they are the ones most likely to lose their job in an acquisition.

What an Acquisition Means for Employees. One of the most confusing aspects of vesting is that it is calculated on a per-grant basis. After three years your company gave you one additional grant of 10, shares not as generous as what we recommended in The Wealthfront Equity Plan. If you leave after six and a half years on June 30, you will have vested all of your original grant because you stayed the required four years post hiring date and Therefore in the example above you would have vested 36, shares if you stayed 3.

Sure, vesting and its intricacies can be a challenge to understand. Keep in mind though, that the concept and its permutations did not evolve overnight, rather through many years and in order to address multiple aspects of the hiring process and retaining the best talent.

Vesting of stock options has become a fixture among Silicon Valley companies and you are better off having a solid understanding of the concept.

Learn about your grants and their terms. After all, a lot of your net worth will be affected by decisions related to your vesting. He serves as a member of the board of trustees and vice chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship.

Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. Explore our Help Center or email knowledgecenter wealthfront. One of the biggest changes in the structure of Silicon Valley private company compensation over….

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View all posts by Andy Rachleff. Tags accelerated vesting , buyout firms , career advice , career planning , double trigger , employee compensation , employee stock ownership , Microsoft , Silver Lake Partners , Skype , stock options , vesting Questions?

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