Vesting Schedules, Explained
Updated ·6 min read·Reviewed by the StockTools.ai Research Team
- ▸The default is four years with a one-year cliff: nothing at all for twelve months, then 25% at once, then the rest monthly or quarterly.
- ▸A backloaded schedule such as 5/15/40/40 pays out far less in years one and two than a straight 25% per year, which makes offer comparisons using the grant total misleading.
- ▸Vesting and exercising are separate events for options, and vesting alone triggers no tax on an option grant.
- ▸Unvested equity is forfeited when you leave, in almost every plan, which is what makes the vest calendar a real component of the decision to change jobs.
- ▸Acceleration on acquisition is a negotiated term, not a standard one, and single-trigger and double-trigger acceleration behave very differently.
The default shape and why it exists
Four years, one-year cliff. On a grant of 4,000 shares starting January 1, you own nothing until the following January 1, when 1,000 vest in a single event. After that the remaining 3,000 vest in equal slices, typically monthly at about 83 shares or quarterly at 250, until the grant is exhausted at the end of year four.
The cliff is a retention device with a specific purpose: it means a hire who leaves inside twelve months takes no equity with them. Leave on day 364 and you forfeit the entire grant. Leave on day 366 and you keep a quarter of it. That single day is worth 1,000 shares, which is why resignation dates near a cliff are worth checking against the vest calendar rather than the calendar month.
After the cliff, the frequency matters less than people expect but is worth knowing. Monthly vesting means a departure costs you at most a few weeks of accrual. Quarterly or annual vesting means leaving one week before a vest date forfeits up to three months or a full year of equity. Annual vesting after the cliff is the least employee-friendly common structure, and it appears more often than it should in offers that lead with a large headline number.
Backloading, and why the headline number misleads
Not every four-year grant pays evenly. A backloaded schedule vests a small share early and concentrates the payout in years three and four. The best known version is 5/15/40/40: five percent in year one, fifteen in year two, then forty and forty. Amazon has used this structure for years, and other large employers have copied it.
The arithmetic matters when comparing offers. Two companies both offer $400,000 of stock over four years. Company A vests 25% a year, so year one delivers $100,000. Company B uses 5/15/40/40, so year one delivers $20,000 and year two delivers $60,000. Over the first two years that is $200,000 against $80,000, a $120,000 difference from identical headline grants. Backloaded plans often pair with a larger cash signing bonus in years one and two, specifically to paper over that gap, and the bonus does not repeat.
The reason employers do it is retention through year four rather than year one, and the effect on you is that leaving early costs disproportionately more. When comparing offers, compute the vest value year by year rather than dividing the total by four. That single spreadsheet column changes which offer is larger more often than most candidates expect.
Vesting versus exercising versus taxation
For RSUs the three events collapse into one. Shares vest, they are delivered, and their full value is taxed as ordinary income that day. There is nothing to exercise and no decision to make.
For options the events separate. Vesting means an option becomes exercisable; it does not deliver shares, cost you anything or trigger tax. Exercising is the separate act of paying the strike price to acquire the shares, and that is where the tax consequences begin: ordinary income on the spread for a non-qualified option, an alternative minimum tax adjustment for an incentive stock option. A fully vested option you never exercise produces no tax at all.
This distinction is the source of the most common piece of equity-comp confusion, and it has a practical edge. Vested options come with an expiration date, usually ten years from grant, and a much shorter window after you leave the company, often ninety days. Vested but unexercised options are a decision you still hold. Vested RSUs are shares you already own and have already paid tax on.
What happens when you leave
Unvested equity is forfeited. That is the rule in nearly every plan, and it applies whether you resign, are laid off, or are terminated for cause. There is no partial credit for the eleven months you worked toward the next tranche. The exception worth reading your documents for is a severance agreement that provides for continued vesting or accelerated vesting, which is negotiable at senior levels and rare below them.
Vested equity behaves differently by instrument. Vested RSU shares are yours; you already paid tax on them and they leave with you. Vested options usually come with a post-termination exercise window of ninety days, after which they expire worthless. At a public company that window is an inconvenience. At a private company it is a real problem: exercising might cost tens of thousands of dollars for shares you cannot sell, and incentive stock options lose their status three months after termination in any case.
A minority of companies offer extended post-termination exercise windows of seven or ten years, which removes the forced choice. It is a genuinely valuable term and an unusual one, and it is written in the plan document rather than the offer letter. Reading for it before signing is easier than discovering its absence during a resignation.
Acceleration, refreshers, and the cliff of the fourth year
Acceleration determines what happens to unvested equity in an acquisition. Single-trigger acceleration vests some or all of the grant when the company is acquired. Double-trigger acceleration requires two events: the acquisition and, typically within twelve months, your termination without cause or resignation for good reason. Double-trigger is far more common because acquirers prefer employees whose incentives survive the deal, and single-trigger is mostly a founder and executive term.
Where nothing is specified, the acquirer decides during negotiation, and outcomes range from full assumption of the grant on the original schedule to cash-out at the deal price to cancellation of unvested shares. Anyone joining a company with a plausible acquisition path should read the change-of-control section of the plan document rather than assume the friendly outcome.
The last thing to plan for is the year-four cliff on the other side. When a four-year grant fully vests, your annual compensation drops by whatever that grant was delivering, unless refresher grants have been layered in along the way. Companies that grant annual refreshers effectively build a rolling ladder, so a fourth-year employee has four overlapping grants vesting simultaneously. Companies that grant only at hire produce a compensation cliff that surprises people at exactly the point they have become most valuable, and it is the single most predictable cause of a fourth-year resignation.
FAQ
What is a one-year cliff?
A period at the start of a grant during which nothing vests. Leave before it and you get zero equity. Reach it and a full block, usually 25% of a four-year grant, vests in one event, after which the remainder vests in smaller regular increments.
What is a 5/15/40/40 vesting schedule?
A backloaded four-year schedule paying 5% in year one, 15% in year two, then 40% in each of years three and four. Compared with an even 25% per year, it delivers $120,000 less over the first two years on a $400,000 grant.
Do I pay tax when my options vest?
No. Vesting only makes an option exercisable. Tax consequences begin at exercise, and they differ depending on whether the option is an incentive stock option or a non-qualified one.
What happens to my unvested shares if I quit?
They are forfeited under nearly every plan, with no partial credit for time served toward the next tranche. Vested RSU shares are yours to keep, and vested options usually must be exercised within a short post-termination window, commonly ninety days.
What is the difference between single-trigger and double-trigger acceleration?
Single-trigger vests unvested equity when the company is acquired. Double-trigger requires both the acquisition and a qualifying termination, usually within twelve months. Double-trigger is the common form for employees; single-trigger is mostly reserved for founders and executives.
Why do people leave right after their four-year grant vests?
Because total compensation falls when the initial grant is exhausted, unless the employer has been issuing annual refresher grants. Where refreshers are absent, year five pay is materially lower than year four pay for the same job.
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Educational only — not financial advice. Concepts simplified for clarity; markets are messier than definitions.