By Wesley Sebacher, CFP®
Equity compensation comes in many forms, whether it is restricted stock grants, incentive stock options, stock appreciation rights, etc. Incorporated in the compensation are specific terms as to how each form of equity compensation is treated and the percentage you rightfully own over a specified period.
For any type of right or option toward equity compensation, you will commonly be given an expiration date for each grant, such as 10 years from the date of grant. This will allow most individuals ample time to exercise their options.
Equity compensation is typically subject to a vesting schedule, which determines when and how much of your equity compensation you own or are vested in. If you are fortunate, you will have the benefit of immediate vesting, which means from the moment you receive your equity compensation, you are 100% vested.
However, that is not the case for many professionals. Most will be subject to either cliff vesting or a graded vesting schedule. An example of cliff vesting is a 3-year schedule, in which you will be unvested for the first two years. But, at the end of your 3rd year of service, you will be fully vested.
For a graded vesting schedule, you may have a 6-year vesting schedule where you are not vested for the first year and then vest 20% each year for the following 5 years. At the end of the 6-year term, you will be fully vested.
Lastly, you may fall somewhere in between those options with a mixture of cliff and graded vesting. For example, you have a 4-year vesting schedule and after the first full year of service you are vested 25%. For the following 3 years, you are vested at 1/36 of the remaining shares per month for the final 36 months of the vesting period. Once the 4-year schedule is up, you are fully vested.
Understanding your vesting schedule will give you a better understanding of your equity compensation ownership and how favorable or unfavorable your benefits are. Discussed here is a brief overview of how a vesting schedule works and does not incapsulate all the terms and conditions accompanying your equity compensation. Reviewing your equity compensation with a qualified financial professional can help you better understand your benefits and what you may be leaving on the table when considering a job change.
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