Vesting - Vesting Arrangements and Terminology

Vesting Arrangements and Terminology

A vesting period is a period of time an investor or other person holding a right to something must wait until they are capable of fully exercising their rights and until those rights may not be taken away.

In many cases vesting does not occur all at once. Specific portions of the rights grant vest on different dates over the duration of the period of the vesting. When part of a right is vested and part remains unvested, it is considered partly vested.

In the case of partial vesting, a vesting schedule is a table or chart showing the portion of a right that is vested over time. Most typically the schedule provides for equal portions to vest on periodic vesting dates, usually once per day, month, quarter, or year, in stair-step fashion over the course of the vesting period. There is often a cliff by which the first few steps in the graph are missing, so that there is no vesting at all for a period (usually six or twelve months in the case of employee equity), after which there is a cliff date upon which a large amount of vesting occurs all at once. Some arrangements provide for accelerated vesting, by which all or a major portion of the unvested right vests all at once upon the occurrence of a specified event such as a termination of employment by the company or acquisition of the company by another. Less commonly, the vesting schedule may call for variable grants or subject to conditions such as reaching milestones or employee performance. "Graded vesting" (vesting after each year until the employee is fully vested) may be "uniform" (e.g. 20% of the compensation vested each year for 5 years) or "non-uniform" (e.g. 20%, 30% and 50% of the compensation vested each year for the next three years).