Cliff Vesting

finance a la shmoop. what does it mean to be vested ?well here's what I mean

invested but vested in a financial sense has almost nothing to do with Cashmere. in [man in sweater vest smiles and waves]

most applications the term vested refers to stock option grants. and if you don't

know what a stock option is to stop watching now and go watch the stock

option video first. all right well these things are complex in the way they work

because they're more or less the modern-day equivalent of golden

handcuffs ,and no not the Fifty Shades kind .when an employee joins a typical

private small Silicon Valley technology company they're granted say twenty

thousand stock options in the company. the standard structure of an esop or

employee stock option plan. not the guy who wrote fables. the normal structure is

that the options vest over four years with a one-year cliff. what does all this

mean? well the one year cliff means that an employee vests or owns zero of the

options she has been granted until she hits her one-year anniversary at you

know whatever dot-com. it kind of sort of works like this. [ people celebrate]

your parents have decided to give you 20 bucks a month on your 14th birthday but

you don't get to start collecting the money until your 15th birthday and on

your 15th birthday you get a big fat check for $240. at 12 months times 20

bucks using advanced calculus there. now that you're 15 you get 20 bucks a month

for three more years or thirty six more months until you turn 18 and then you're

on your own no more allowance for you. so now let's

take this structure and apply it to a stock option grant. well the employee has

granted 20,000 options she gets none for the first 12 months but then after 12

months she vests or wears 1/4 of the options she was granted. she now legally

has title ownership of those granted options. even if the company fires her

the next day she still keeps those options but going forward she'll vest [Donald Trump fires someone]

monthly and be still at the company for another 36 months,

for a total of 48 months to fully vest into ownership of the 20,000 options. why

the one-year cliff well because many employees simply don't work out at

startups and because resources are slim companies have to fire employees who

just aren't cutting it quickly or the companies go bankrupt in everyone's out

of a job. and you know that goes well the one year cliff exists so that companies

can evaluate employees carefully before granting them a meaningful ownership

stake in the company. note that these are just options she's vesting into as

well. she doesn't own the stock. if she wants to buy out the options

she'll pay per share whatever the strike price is and you'll learn that $5.00 word

from watching the stock options video right? so if she has 20,000 options after

four years she's vested in two and then wants to leave with her owned shares

well in the strike price is 25 cents a share well she'll have to write a check

to the company of 25 cents times twenty thousand or five grand [woman wearing 20,000 options sign smiles]

but then own the 20 thousand shares instead of own the twenty thousand

options. if company goes public or is sold for say thirty bucks a share she

sells 20 thousand times 30 bucks or six hundred grand in winnings. yeah nice work

if you can get it. just think of all the fancy vests you could buy yourself with

that kind of cash. yeah all right moving on. [woman wears gold vest]