Graded Vesting

Categories: Company Management

See: Vesting.

A contest to see who wears the finest waistcoat. We give Johnny Depp a B+.

Also, in finance, the term refers to how an employee accumulates retirement benefits.

There are fundamentally two methods for employees to earn retirement bennies at a company: cliff vesting and graded vesting.

Cliff vesting means all the benefits accrue suddenly when an employee reaches certain criteria. An employee becomes eligible for pension benefits when they've served 20 years with the company. At 19 years, 364 days of service, the employee is entitled to no benefits. Zero. Nothing. At exactly 20 years, they can retire at full benefits. Sudden, like driving off a cliff.

Graded vesting is like driving up a ramp. As the employee gathers tenure at the company, the amount of potential benefits increase. So if someone retires after 15 years, they still get something. Not as much as 20 years, but the 15 years has earned them some benefits.

Many programs have combinations between cliff and graded structures. So an employee has to reach 20 years to get any benefits, but after reaching that threshold, the amount they receive in retirement increases with the amount of service they accumulate. A 19-year veteran would get nothing, but a 25-year veteran would get more than someone with 21 years of service.

Related or Semi-related Video

Finance: What Does It Mean to Be Vested?226 Views

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

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

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

00:20

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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can evaluate employees carefully before granting them a meaningful ownership

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

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

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

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

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

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

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

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

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

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

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

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

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