If you’ve ever started a full-time job, heard the word “vesting schedule,” and nodded vaguely, you aren’t alone. “Vesting” is one of those terms people tend to drop without checking to make sure you know what it means — which is weird, because it could have a big impact on your financial future.
What is vesting?
If you’re given something that vests over time, you don’t actually own it right away. Instead, it gradually becomes yours, a little bit at a time. Two common examples are employer 401(k) matching contributions and employee stock options.
For example, let’s say your employer 401(k) match vests evenly over four years. What’s actually happening is that they’re putting their match into the same investments, but they’re kept in a separate bucket in your account. After one year, you’d actually only own 25% of the investments in that bucket. If you left your job at that point, you’d take that 25% with you, and they’d get to take the rest back. After two years, you’d own 50%. After three years, 75%, and after four years, it’d all be yours. (Of course, you don’t need to wait for your own contributions to vest. They’re already yours.)
The same thing could apply to any company stock options they granted you: You’d own (and be allowed to exercise) 25% of the options you were granted after one year, 50% after two years, and so on and so forth.
This helps your employer in two ways. First, it gives you a reason to stick around for a while. And if you don’t end up staying at the company for very long, then they would get some of their money back.
OK, so what’s a vesting schedule?
Your vesting schedule is the specific rundown of what you’ll get when. The “vesting evenly over four years” thing we mentioned above is a pretty common one, but there are tons of different ways your actual vesting schedule might be structured.
For one thing, vesting doesn’t have to happen evenly. For example, your assets might vest 25% after one year, 50% after two years, and 100% after three years. Or you could have a four-year vesting schedule with a one-year “cliff.” (A cliff is kind of like a delayed start and is more common with stock options than with 401(k) matching contributions.) In that example, you’d own 0% of your assets until one year later, at which point you’d own 25%. After that, the rest of your assets would vest gradually every month (or quarter, depending on your plan) over the next three years.
Some vesting schedules start from the day you get hired — they’d end four (or however many) years after your hire date, and any matching contributions or options you got after that would be 100% vested right away. Other vesting schedules start from the date you actually get each contribution or set of options — so anything you get this month would fully vest four (or however many) years from now, and anything you get next month would fully vest four years from next month. Typically, that kind of “rolling” vesting schedule would just keep on rolling.
If you aren’t sure about your own vesting schedule, ask your HR team to give you the inside scoop. They should definitely be able to tell you more.
What does vesting mean for me?
If you have stock options or a 401(k) match on a vesting schedule, you’ll need to think about when you plan to leave the company. If you’re planning to stick around for a while, then you probably don’t need to worry about your vesting schedule too much.
But if you might want to leave your job before your vesting schedule is up, the decision can definitely affect your bottom line. This is particularly true with 401(k) matching contributions, which are very real money you’d be sacrificing.
We’re never going to tell you to stay in a bad job — your mental health and career trajectory could easily be more important than the impact of leaving unvested assets on the table. But if your job is OK, and you think you can make it to the end of your vesting schedule, it might be worth staying put.
If you have unvested stock options, then you wouldn’t be sacrificing “real money” if you left your job — you’d be sacrificing the possibility of money in the future. In that case, ask yourself a few questions to help you think through the range of possible outcomes:
Will there be actual company stock to buy by the time your options vest?
If your company is publicly owned, aka already has stock in the market, then the answer is pretty much yes.
If your company is about to go public (IPO), that process will probably be finished by the time your options vest. So, yes.
If you’re at a private company that isn’t planning either of those things, maybe not. In that case, if you want to leave, your unvested options probably don’t need to carry much weight in your decision.
If yes, how much do you think the company’s stock will be worth by the time your options vest? This is key. If you think the stock will be worth more than your options’ strike price — meaning you’ll make money if you exercise the options, aka buy the stock — then it might be worth sticking around at your current job until your options vest.
(Btw, if you do end up staying and waiting for your options to vest, we definitely recommend chatting through the decision on whether to exercise them with a financial planner and a tax pro.)
And just like that, another previously-intimidating money term is checked off the list. Boom.
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