ShmoopTube

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finance a la shmoop. what does it mean to be vested ?well here's what I mean

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invested but vested in a financial sense has almost nothing to do with Cashmere. in [man in sweater vest smiles and waves]

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most applications the term vested refers to stock option grants. and if you don't

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know what a stock option is to stop watching now and go watch the stock

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option video first. all right well these things are complex in the way they work

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because they're more or less the modern-day equivalent of golden

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handcuffs ,and no not the Fifty Shades kind .when an employee joins a typical

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private small Silicon Valley technology company they're granted say twenty

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thousand stock options in the company. the standard structure of an esop or

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employee stock option plan. not the guy who wrote fables. the normal structure is

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that the options vest over four years with a one-year cliff. what does all this

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mean? well the one year cliff means that an employee vests or owns zero of the

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options she has been granted until she hits her one-year anniversary at you

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know whatever dot-com. it kind of sort of works like this. [ people celebrate]

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your parents have decided to give you 20 bucks a month on your 14th birthday but

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you don't get to start collecting the money until your 15th birthday and on

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your 15th birthday you get a big fat check for $240. at 12 months times 20

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bucks using advanced calculus there. now that you're 15 you get 20 bucks a month

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for three more years or thirty six more months until you turn 18 and then you're

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on your own no more allowance for you. so now let's

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take this structure and apply it to a stock option grant. well the employee has

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granted 20,000 options she gets none for the first 12 months but then after 12

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months she vests or wears 1/4 of the options she was granted. she now legally

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has title ownership of those granted options. even if the company fires her

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the next day she still keeps those options but going forward she'll vest [Donald Trump fires someone]

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monthly and be still at the company for another 36 months,

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for a total of 48 months to fully vest into ownership of the 20,000 options. why

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the one-year cliff well because many employees simply don't work out at

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startups and because resources are slim companies have to fire employees who

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just aren't cutting it quickly or the companies go bankrupt in everyone's out

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of a job. and you know that goes well the one year cliff exists so that companies

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can evaluate employees carefully before granting them a meaningful ownership

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stake in the company. note that these are just options she's vesting into as

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well. she doesn't own the stock. if she wants to buy out the options

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she'll pay per share whatever the strike price is and you'll learn that $5.00 word

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from watching the stock options video right? so if she has 20,000 options after

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four years she's vested in two and then wants to leave with her owned shares

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well in the strike price is 25 cents a share well she'll have to write a check

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to the company of 25 cents times twenty thousand or five grand [woman wearing 20,000 options sign smiles]

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but then own the 20 thousand shares instead of own the twenty thousand

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options. if company goes public or is sold for say thirty bucks a share she

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sells 20 thousand times 30 bucks or six hundred grand in winnings. yeah nice work

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if you can get it. just think of all the fancy vests you could buy yourself with

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that kind of cash. yeah all right moving on. [woman wears gold vest]

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