Stock Option Vesting & Expiration

TL;DR

Vesting Schedule and Expiration date define the time period when you will be able to exercising your stock options and when they will expire.

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

What is stock option 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 vast majority of companies offer a 4-year vesting schedule with a 1-year cliff. What this means is that in a typical vesting schedule, it will take four years of employment for your options to become fully vested and you don't vest anything until one full year of employment.

What is a cliff date?

The first important part of the vesting schedule is your Cliff Date. This is the first date that any of your options will become eligible for exercise. The Cliff Date is typically 1 year after the issue date of the grant or the Vesting Calculation Date. In the typical 4-year vesting schedule with a 1-year cliff this means that 25% of one fourth of your options will vest after one year. Again, the reason for a cliff date is so that employees are incentivized to stay at the company.

After my cliff date, how does vesting work?

Once you reach your cliff date, the next important piece of information is the rate at which your shares vest. Typically, options will vest monthly following the cliff date. In the standard 4-year 1-year cliff plan referenced above, you will vest 1/48th of your options each month following your cliff date.

Outlined below is an example of a typical cliff vesting schedule for 20,000 options.

  • Grant of 48,000 options on 1/1/2020 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."

Essentially, 1/4 aka 12,000 options will vest after the 1-year cliff and 1/48 aka 1,000 options will vest each subsequent month.

.
MONTHS EMPLOYED OPTIONS VESTED CUMULATIVE OPTIONS
Day 1 0 or 0% (Vesting Calculation Date) 0%
1 Year12,000 or 25% (Cliff Date: 1/48 of the options per mo for 12 months = 1/4) 12,000 (25%)
13 Months 1,000 or 2.0833% (1/48th) 13,000 or 27.0833% (13/48th)
14 Months 1,000 or 2.0833% 14,000 or 29.16067% (14/48th)
... ... ...
2 Years 1,000 or 2.0833% 24,000 or 50%
... ... ...
3 Years 1,000 or 2.0833% 36,000 or 75%
... ... ...
4 Years 1,000 or 2.0833% 48,000 or 100% (Fully Vested)
vesting-schedule
Typical 4-year vesting schedule with a 1-year cliff

What happens when my stock options vest?

Once your options vest, you can now exercise them. This doesn't come for free, meaning you must purchase shares at your exercise or strike price and often times will owe taxes upon exercise as well. The question then arises of "When should I exercise my stock options", but you have cleared the first hurdle in equity ownership: vesting. The next two hurdles are exercising your options and eventually selling your shares.

Once you vest your shares, you are not required to exercise immediately, but you should be aware of your expiration date. This will be the last date that you can exercise your vested options.

What does a stock option Expiration Date mean?

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 (additionally, any unvested options or shares will be forfeited once your employment ends):

  • 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.

Can I exercise options before I vest?

The simple answer is yes, but it depends on the Stock Option Plan and Agreement issued by your company. Many companies allow what is called Early Exercise, which allows employees to exercise prior to vesting (just make sure to file an 83b!). The catch here is that you will still need to vest shares (even if exercised) in order to maintain the equity after leaving the company. ESO Fund recommends checking with the company on whether or not you can early exercise your options.

Feel free to reach out to ESO Fund for questions on equity and help funding your option exercise.

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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