Meaning of vested stock options

Search AdvisorFind from myStockOptions. Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more. What is a vesting schedule? Example: You are granted 5, stock options or shares of restricted stock. Once each portion vests, depending on your grant type you can exercise the corresponding options or sell the shares of restricted stock.

This graphic illustrates the vesting schedule: For survey data on the different types of vesting schedules that companies use, see an FAQ on typical vesting schedules and an FAQ specifically on time-based schedules.

Example: Following the situation of the prior example, you leave your company three years after the date of grant. You forfeit the 1, shares that have not yet vested.

For any unexercised vested stock options potentially 3, you must follow the post-termination exercise rules. Before you leave your company, be sure you review your vesting schedule to determine how many unvested awards you will lose and their likely value, as that could influence your decision about when or whether to change jobs. The concept of vesting is important to every employee of a firm offering benefits ranging from K matching contributions to restricted stock or stock options.

Many of these benefits are subject to a vesting schedule. You should understand the language and terms for vesting in your employer's various contribution plans before making a commitment.

While some employer contributions are fully vested at the time they are provided, others are subjected to time limits and operate on an escalating scale over time known as a vesting schedule. The immediate vesting means that the contribution belongs to you in its entirety, although any withdrawals are subject to the IRS rules governing these plans. This form of vesting is called cliff vesting and means that you have no claim on the items offered until the actual third-anniversary date is reached. If you leave the firm after two years that means you would not be able to take or cash in any of your stock grants.

An alternative to cliff vesting is graded or graduated vesting which is governed by a vesting schedule.

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The use of stock options is common in many privately held start-ups and technology firms. This stock option offers the right to acquire a share of stock at a particular price on or before a particular date. Instead of a date, another right-to-acquire option might be a trigger event such as a change of control of the firm.

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