Finance: What Does It Mean to Be Vested?

What does it mean to be vested? Vested refers to having an interest in something. It’s typically used when talking about retirement plans and things like 401k and 403b plans. So, when someone is fully vested it means that the funds in the plan belong to you with no penalty.

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Transcript

00:28

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

00:31

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

00:36

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

00:39

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

00:45

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

00:50

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

00:56

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

01:01

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

01:06

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

01:10

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

01:14

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

01:19

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

01:25

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

01:30

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

01:35

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

01:39

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

01:43

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

01:47

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

01:54

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

01:59

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

02:03

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

02:09

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

02:16

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

02:19

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

02:24

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

02:29

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

02:32

can evaluate employees carefully before granting them a meaningful ownership

02:37

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

02:41

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

02:46

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

02:51

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

02:56

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

03:00

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

03:04

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

03:09

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

03:13

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

03:17

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

03:23

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

03:27

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