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 thousand shares.

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: 83(b) Election, Golden Handcuffs.