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Vested vs. unvested: what does it mean?

Vested vs. unvested: what does it mean?
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Attracting and retaining top talent is a strategic priority for any business. So, in addition to offering competitive salaries, some companies also offer their employees equity in the company in the form of stock. But usually, this stock has to ‘vest’ first, meaning that employees must work for the company for some time to get their hands on the stock.

Here’s everything you need to know about what stock vesting is and how it works.

What is stock vesting?

In simple terms, vesting is the process of earning an asset, like shares or share options.

So with vesting, a company does not offer you stock right away. Rather, it sets a schedule for when you’ll earn your stock or stock options in full.

The schedule may be:

  • Time-based (typically three to five years)
  • Milestone-based (e.g. after completing a certain project or when the company reaches a certain goal)
  • A combination of time-based and milestone-based

Time-based vesting tends to be the most common.

As an example, let’s say that upon being hired by a company, you’re offered a certain number of shares or share options over a four-year period. If you remain with the company for the entire four years, you’ll get your shares or share options in full. But if you were to leave at any time within that four-year period, you would forfeit some (or even all) of your shares or share options.

So, from this, we can deduce the meaning of vested and unvested stock.

  • Vested stock is stock you have fully earned and own outright. You can sell or otherwise dispose of them at will. If you were to leave the company, you could take them with you.
  • Unvested stock is stock promised to you but that you’ve not yet fully earned under the terms of your vesting schedule. So if you were to leave, you would have to forfeit the stock.

In the UK, companies tend to offer stock and stock options to employees through HMRC-approved employee share schemes since these come with tax advantages. There are four such schemes and these are:

  • Save as You Earn (SAYE)
  • Company Share Options Plans (CSOPs)
  • Enterprise Management Incentives (EMIs)
  • Share Incentive Plans (SIPs)

Why do companies give vested stock?

It’s clear to see why companies impose vesting schedules on the stock or stock options they give employees. The goal is to make sure that employees stick around for the long haul and give their best performance.

Basically, if you stand to gain financially by collecting the shares (perhaps because they’ve risen in value over time), you have a huge incentive not just to stick with the company for the duration of the vesting period, but to also perform well to avoid being let go. And with this, the company gets maximum value out of you.

What if I want to own stock right away?

The good news is that you don’t have to wait for years for your company-promised stock or stock options to vest so that you can officially own stock.

You could independently buy stock not tied to your company through the stock market. These days, it’s incredibly easy. Using one of our recommended online share dealing accounts, you can literally start investing and become a shareholder in leading companies in minutes.

Or, if you want to keep any investment profits from the taxman, you could open a stocks and shares ISA, where all gains are tax free.

Whichever you opt for, remember to do solid research first before investing and also think long term. In the short run, volatility in the stock market is common and expected, especially during these turbulent times of the coronavirus pandemic and Brexit. But in the long term, stocks have consistently proven to be a reliable way to build wealth for investors.

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