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FAQs

What happens to vested shares when you quit? ›

At the time of your departure, you are generally allowed to exercise the vested portion of your stock option awards, and you will forfeit the unvested portion. If you are planning on leaving your job, you should review the details of your vesting schedule.

In a vesting agreement, '4 years with a one-year cliff' is a typical vesting schedule used by startups. A one-year cliff means that nothing vests for the first year. After a year, vesting reaches 12/48; the remaining balance will vest for three years at 1/36 a month for 36 months.

If you quit, you could take the stock with you. *Note: If your contract includes a clawback, your company can take back your vested stock options when you leave the company. The agreement might require you to sell it back at the price you paid for it or at the FMV as of your termination.

Vesting RSUs

You may have to stay at the company for a certain amount of time, and sometimes you or the company must also hit a stated milestone (like an IPO, for example) for RSUs to vest. But unlike stock options, you don't need to purchase them to own them—you just need to wait for them to vest.

Your capital gain will naturally be zero (or close to zero) if you sell them immediately because your tax basis is equal to their value at the moment they vest. Selling immediately allows you to reduce concentration risk more quickly by lowering your exposure to your employer and reinvesting in a diversified portfolio.

If you were granted stock options and have already exercised some or all of those vested options before your departure, you already own those shares—your company usually can't claim or repurchase them when you leave. However, you may want to check your grant to be sure.

For example, if you receive stock options with a vesting schedule of four years, after the four years you will have earned the right to purchase all of the options shares at the pre-set exercise price.

Cliff vesting grants ownership in full after a specific point. For example, a saver whose 401(k) uses a three-year cliff vesting fully owns the company match after three years of service. However, they get nothing before then. Graded schedules phase in ownership gradually, at set intervals.

A cliff is a period of time that must pass before any options can start to vest, after which they do so on a set schedule. Typically, a cliff is one year - that means that 12 months must pass before an employee's options can start to vest. Think of it like a probation period.

Vesting is not a taxable event and so you owe no tax on vesting. You only have to pay tax on the gain when you sell the shares. In contrast, if you do not file a Section 83(b) election , you effectively defer being taxed until vesting.

Can your company take back your vested shares? ›

Clawback provisions and repurchase rights

Unfortunately, it is usually these documents that contain language about clawback or repurchase rights. With clawback or repurchase rights, after a triggering event, the company has the right to repurchase vested shares, whether exercised or not.

Once they are vested, the units are converted into common stock shares and carry all the usual rights of stock ownership. The same goes for dividends: restricted stock units do not pay dividends until they vest.

Once the Restricted Stock Units vest, the employee receives shares of the company stock in a brokerage account. If the company is publicly traded, selling the shares can be as simple as placing a trade order. Note that blackout periods may apply.

Those plans generally have tax consequences at the date of exercise or sale, whereas restricted stock usually becomes taxable upon the completion of the vesting schedule. For restricted stock plans, the entire amount of the vested stock must be counted as ordinary income in the year of vesting.

Key Points. A common rule of thumb is to sell restricted stock units when they vest because there is no tax benefit to holding the stock any longer. In a silo, selling RSUs as they vest often makes sense, but the decision can be complicated if you have other forms of equity, namely employee stock options.

401(k) vesting after termination

If you leave a job before your 401(k) is fully vested, you'll likely lose the unvested portion of the account. After all, that money isn't legally yours until you've been at your job long enough to satisfy the vesting schedule used by your employer's plan.