Vesting

What Is Vesting?

Vesting is the schedule that determines when a person gains full ownership of an asset granted to them, such as company shares, stock options, or employer contributions to a retirement account. Until an asset vests, the recipient generally does not fully own it and may lose it if specified conditions are not met. Vesting is most often discussed in employee compensation, where it encourages staff to remain with an employer over a number of years.

How Vesting Works

An employer that grants equity usually attaches a vesting schedule, which sets the time periods and conditions for ownership. Two common structures are:

• cliff vesting, where nothing vests until a set date, and then a large portion vests at once
• graded vesting, where ownership builds gradually in regular installments

Many schedules run over several years and may also depend on performance targets. If a person leaves before an asset vests, the unvested portion is usually given up, a result called forfeiture. Vesting applies to awards such as restricted stock unit (RSU)s and stock options, which are part of broader equity compensation packages.

Illustrative Example

Suppose an employee receives a grant of shares on a grant date under a four-year schedule with a one-year cliff. Under such a plan, no shares vest during the first year. At the one-year mark, a set portion vests, and the rest typically vests in regular installments over the remaining three years. If the employee leaves after two years, they keep the shares that have vested by that date and forfeit the rest.

Why Vesting Matters to Investors

Vesting shapes how much equity employees actually own and when they can sell it. Companies disclose vesting terms in their filings, and investors sometimes watch large vesting events because newly vested shares may increase the number of shares that can be sold in the market. Vesting is a matter of contract terms rather than a measure of value, so it does not indicate how a company's stock is likely to perform.