Vesting & Expiration

"In a typical vesting schedule, it will take four years of working at the company for your options to become fully vested."

Vesting

Within your employee stock option grant you will receive an outline of your vesting schedule. Companies have these agreements to provide incentives for employees to stay longer, because a vesting schedule outlines when you receive the option to purchase your shares.

The first important part of the vesting schedule is your Cliff Date. This is the first date that any of your options become eligible for exercise, even though you have technically vested options before this. This Cliff Date is typically 1 year after the issue date of the grant or the Vesting Calculation Date.

The next important piece of information is the rate at which your shares vest following this Cliff Date. Outlined below is an example of a typical cliff vesting schedule for 200,000 options.

  • Grant of 200,000 options on 1/1/2018 with 1-year cliff.
  • "The options in this grant will vest as to one forty-eighth (1/48th) of the total number of Shares on the first day of each month following the Vesting Calculation Date."
.
MONTHS EMPLOYED OPTIONS VESTED CUMULATIVE OPTIONS
Day 1 0 or 0% (Vesting Calculation Date) 0%
1 Year50,000 or 25% (Cliff Date: 1/48 of the options per mo for 12 months = 1/4) 50,000 (25%)
13 Months 4,166.67 or 2.0833% (1/48th) 54,166.67 or 27.0833%
14 Months 4,166.67 or 2.0833% 58,333.33 or 29.16067%
... ... ...
2 Years 4,166.67 or 2.0833% 100,000 or 50%
... ... ...
3 Years 4,166.67 or 2.0833% 150,000 or 75%
... ... ...
4 Years 4,166.67 or 2.0833% 200,000 or 100% (Fully Vested)


Expiration Date

This is simply the last date that you can exercise your options. After this date any un-exercised options will expire and become worthless. Typically, your options will expire 10 years after your Vesting Calculation Date as long as you remain employed. The moment you leave the company (whether voluntarily or non-voluntarily), the expiration date will be sooner:

  • For ISOs you will have 90 days to exercise any options you have vested.
  • For NSOs your company will dictate the amount of time you are given before expiration.
  • RSUs will not expire until your expiration date, however it is possible to convert them into shares of the company, which will have tax implications.
  • Public company stock options will typically be cashed out upon leaving the company.

Employees with expiring stock options often face the dilemma of whether or not to exercise. At the end of the day it comes down to 2 main factors:

  1. Do you believe in the future of the company?
  2. Can you afford to take the risk?

If you don't believe in the future value of the company there isn't any exercise your options just because they exist. You are likely better off investing your hard-earned cash elsewhere. If you do believe in the company and can afford to take the risk, exercise the options! If you cannot afford the risk it may make sense to contact someone like ESO Fund who can cover the cost of exercise and taxes, in exchange for a portion of the future upside.

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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