Vesting Schedules . . .
refer to a method used to make a person’s stock
ownership contingent upon some future event, such as the passage of
time or the achievement of a stated goal. They are commonly a part of
an agreement pursuant to which management or certain company employees
are denied full ownership rights in their shares until the future.
When a vesting schedule applies, an employee is
granted the rights to a specified number of shares of the company’s
stock, but those shares do not really become his until certain defined
events have occurred. For example, an employee may be granted ten
thousand shares of the company’s common stock "subject to
vesting." Those shares may vest upon his remaining employed with
the company for five years. Each year, for instance, two thousand of
his shares may vest and become his providing he is still employed by
the company. If he remains with the company for the full five years,
he will receive all ten thousand shares. If he leaves after three
years of employment, he will receive certificates for only six
Vesting schedules often tie an employee’s rights to
own shares to employment longevity or some other factor such as
company earnings or sales. Often, they are used with noncompete
agreements and employment incentives to encourage effort and loyalty
from important employees.
Because of the complexity of the Internal Revenue Code
and certain technicalities it contains, anyone who receives stock
subject to vesting requirements should consult with an attorney or
accountant to determine the tax effect of receiving it and the
advisability of filing an 83(b) election. See:
Election, Golden Handcuffs.