Vesting
Categories: Careers, Company Management
What does it mean to be vested? Well, you probably already know what it means to be invested. But vested, in a financial sense, has almost nothing to do with cashmere. In most applications, the term "vested" refers to stock option grants. And if you don’t know what a stock option is, stop watching now and go watch our stock option video first.
These things are complex in the way they work, because they’re more or less the modern-day equivalent of golden handcuffs. And not the Fifty Shades kind. When an employee joins a typical, private, small Silicon Valley technology company, they’re granted, say, 20,000 stock options in the company. The standard structure of an ESOP, or employee stock option plan, is that the options vest over 4 years with a 1-year cliff.
What does all this mean? Well, the 1-year cliff means that an employee vests, or owns zero of the options she has been granted until she hits her 1-year anniversary at whatever.com.
It kinda/sorta works like this: your parents have decided to give you $20/month on your 14th birthday, but you don’t get to start collecting it until your 15th birthday. And on your 15th birthday, you get a big fat check for $240. That’s 12 months times 20 bucks, using advanced calculus there. Now that you’re 15, you get $20 a month for three more years, or 36 more months until you turn 18, and then you’re on your own. No more allowance for you.
So now let’s take this structure and apply it to a stock option grant. The employee is granted 20,000 options. She gets none for the first 12 months, but then, after 12 months, she vests or "wears" ¼ of the options she was granted. She now legally has title ownership of those granted options. Even if the company fires her the next day, she still keeps those options. But going forward, she’ll vest monthly for another 36 months, for a total of 48 months to fully vest into ownership of the 20,000 options.
Why the 1-year cliff? Because many employees simply don’t work out at startups. And, because resources are slim, companies have to fire employees who aren’t cutting it quickly. Or they go bankrupt, and everyone's out of a job. The 1-year cliff exists so that companies can evaluate employees carefully before granting them a meaningful ownership stake in the company. Note that these are just options she’s vesting into; she does not own the stock. If she wants to buy out the options, she’ll pay per share whatever the strike price is. And you learned that $5 word from watching the stock options video, right?
So...if she has 20,000 options after 4 years she’s vested into, and then wants to leave with owned shares, and the strike price is 25 cents a share, she’ll have to write a check to the company for 25 cents times 20,000, or $5,000, to then own 20,000 shares. If the company goes public or is sold for, say, $30 a share, she sells 20,000 times 30 bucks, for 600 grand.
Just think of all the fancy vests you could buy yourself with that kind of cash.
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Finance: What Does It Mean to Be Vested?226 Views
finance a la shmoop. what does it mean to be vested ?well here's what I mean
invested but vested in a financial sense has almost nothing to do with Cashmere. in [man in sweater vest smiles and waves]
most applications the term vested refers to stock option grants. and if you don't
know what a stock option is to stop watching now and go watch the stock
option video first. all right well these things are complex in the way they work
because they're more or less the modern-day equivalent of golden
handcuffs ,and no not the Fifty Shades kind .when an employee joins a typical
private small Silicon Valley technology company they're granted say twenty
thousand stock options in the company. the standard structure of an esop or
employee stock option plan. not the guy who wrote fables. the normal structure is
that the options vest over four years with a one-year cliff. what does all this
mean? well the one year cliff means that an employee vests or owns zero of the
options she has been granted until she hits her one-year anniversary at you
know whatever dot-com. it kind of sort of works like this. [ people celebrate]
your parents have decided to give you 20 bucks a month on your 14th birthday but
you don't get to start collecting the money until your 15th birthday and on
your 15th birthday you get a big fat check for $240. at 12 months times 20
bucks using advanced calculus there. now that you're 15 you get 20 bucks a month
for three more years or thirty six more months until you turn 18 and then you're
on your own no more allowance for you. so now let's
take this structure and apply it to a stock option grant. well the employee has
granted 20,000 options she gets none for the first 12 months but then after 12
months she vests or wears 1/4 of the options she was granted. she now legally
has title ownership of those granted options. even if the company fires her
the next day she still keeps those options but going forward she'll vest [Donald Trump fires someone]
monthly and be still at the company for another 36 months,
for a total of 48 months to fully vest into ownership of the 20,000 options. why
the one-year cliff well because many employees simply don't work out at
startups and because resources are slim companies have to fire employees who
just aren't cutting it quickly or the companies go bankrupt in everyone's out
of a job. and you know that goes well the one year cliff exists so that companies
can evaluate employees carefully before granting them a meaningful ownership
stake in the company. note that these are just options she's vesting into as
well. she doesn't own the stock. if she wants to buy out the options
she'll pay per share whatever the strike price is and you'll learn that $5.00 word
from watching the stock options video right? so if she has 20,000 options after
four years she's vested in two and then wants to leave with her owned shares
well in the strike price is 25 cents a share well she'll have to write a check
to the company of 25 cents times twenty thousand or five grand [woman wearing 20,000 options sign smiles]
but then own the 20 thousand shares instead of own the twenty thousand
options. if company goes public or is sold for say thirty bucks a share she
sells 20 thousand times 30 bucks or six hundred grand in winnings. yeah nice work
if you can get it. just think of all the fancy vests you could buy yourself with
that kind of cash. yeah all right moving on. [woman wears gold vest]