Are there other types of vesting schedules?

While a four-year vesting schedule with a cliff is the most common, it’s not the only vesting
schedule out there. 

The second most common is a four-year vesting period with no cliff. 

Sometimes this happens when a company gives an employee a bonus options grant (also called
a refresh grant). Since the company has already established a good relationship with the
employee, rather than having the bonus have a cliff, they start vesting immediately over the next
four years. 

There are other types of vesting schedules out there (like a two-year period with a one-year cliff),
but they aren’t very common. 

Sometimes executives with more leverage negotiate their options to vest under a different
schedule that works better for them, but you almost never run into these. 

What actually happens when my stock options vest? 

Once your options have vested, you now have the opportunity to exercise your options
and purchase shares of the company.

If your company initially granted you 10,000 options, you can now buy up to 10,000 company
shares at the strike price they were granted at. (That’s basically what an option is—a right to buy
shares of the company at a set price, regardless of the current fair market value of those shares). 

That means even if those shares are currently valued at $10, $20, or even $100 a share, you can
still buy them for your original strike price—even if that’s just 50 cents a share. 

(Although note that you’ll likely owe taxes over the difference!) 

Example Benefits Under Different Vesting Schedules
Before taking a new job and leaving your company, it's important to calculate what, if any,
portion of employer contributions you would get to keep under your firm's vesting plan. These
scenarios can serve as a reference when making employment decisions.

Tom's employer provides a dollar-for-dollar annual matching contribution of up to 5% percent of

his salary of $50,000 to his 401(k) account. To take advantage of the match, he contributes the
full 5% during his tenure at the company. He leaves the company after two years with a $10,000
account balance ($5,000 in employee contributions and $5,000 in employer contributions).

Under an immediate vesting schedule, Tom would fully own any money given to him by his
employer from the date of contribution. He would get to keep the full $5,000 in employer
contributions (along with the money he contributed). This means he would not be any worse off
by leaving the company now versus later.

Let's say that Tom's 401(k) plan vests on a five-year graded schedule that grants 20% ownership
after the first year and then 20% more each year until he gains full ownership (100%) after five
years. After two years, Tom would be 40% vested. He would keep only $2,000 of the $5,000
matching contribution (0.4 multiplied by $5,000) and forfeit the other $3,000. It may still make
sense for Tom to leave the company now, as he would have to stay another three years to
become fully vested.

Under a three-year cliff vesting schedule, Tom would have no ownership of employer
contributions to the plan after two years. He would have to forfeit the full $5,000 given to him
during his tenure. Tom may want to stay at the company for one more year if keeping that $5,000
is important to him.