Equity vesting is the process of earning ownership of company shares or stock options over time rather than receiving them all at once. Most grants run four years with a one-year “cliff,” meaning you earn nothing during your first twelve months and then accumulate ownership in regular increments after that. The structure keeps both sides invested: the company retains talent, and you build wealth tied to the company’s growth.
Types of Equity That Vest
The type of award you receive determines how you acquire shares, when you owe tax, and what you walk away with if you leave. Four forms dominate modern compensation packages.
Restricted Stock Units (RSUs) are a promise to deliver shares once vesting conditions are met. You pay nothing upfront. When shares vest, they land in your brokerage account and are taxed as ordinary income at that moment.
Incentive Stock Options (ISOs) give you the right to buy company stock at a locked-in exercise price. ISOs are only available to employees and carry favorable tax treatment if you meet specific holding periods, but exercising them can trigger the Alternative Minimum Tax.
Nonqualified Stock Options (NSOs) work like ISOs mechanically but are available to employees, contractors, and advisors. The spread between your exercise price and the stock’s market value is taxed as ordinary income the moment you exercise.
Restricted Stock Awards (RSAs) are actual shares transferred to you on the grant date, subject to forfeiture until they vest. Because you receive real property upfront, RSAs are the one type of award eligible for a Section 83(b) election.
The distinction matters most at tax time and when you leave. RSUs and restricted stock deliver shares you own outright once vested. Stock options give you the right to buy, so you need cash (or a cashless exercise arrangement) to convert them into actual shares.
How a Vesting Schedule Works
The standard schedule runs four years with a one-year cliff. During the cliff, you earn nothing. Leave before your first anniversary and you walk away with zero equity. On day 366, you vest into 25% of your total grant at once. The remaining 75% typically vests in equal monthly or quarterly installments over the next three years.
Monthly vesting means you earn 1/48th of your grant each month. Quarterly vesting means 1/16th every three months. Both get you to the same place by year four; monthly just produces a smoother curve. Your specific schedule lives in the equity award agreement, the document signed by you and the company that spells out the exact dates, percentages, and conditions.
Time-Based vs. Milestone-Based Vesting
Time-based vesting is far more common. You stay employed, your equity vests. Milestone-based vesting ties ownership to hitting specific targets like a revenue goal, a product launch, or a valuation threshold. Milestones are rare outside executive packages and certain startup arrangements, partly because defining and measuring them creates room for disputes.
A Note on Founder Reverse Vesting
Founders sit on the opposite side of this mechanic. Instead of earning shares over time, founders typically receive all their shares on day one, and the company holds a right to buy back unvested shares at cost if a founder leaves early. This “reverse vesting” solves the free-rider problem and is almost always required by outside investors. The schedule usually mirrors the employee model: four years, one-year cliff. If you’re a regular employee, this doesn’t apply to you, but it’s why founders and early hires can appear to have very different-looking equity arrangements.
What Happens to Your Equity When You Leave
Your departure triggers an immediate split between what you’ve earned and what you haven’t. Unvested equity is forfeited automatically under the terms of your agreement and returns to the company’s equity pool. No negotiation, no payout. The company cancels those shares and reallocates them to future hires.
Vested equity stays yours, but the clock starts ticking on what you do with it.
Post-Termination Exercise Windows for Options
If your vested equity consists of stock options, you don’t automatically own shares. You own the right to buy shares at your exercise price. After you leave, most plans give you a limited window to exercise before the option expires.
For ISOs, the tax code creates a hard boundary. Exercise more than three months after your last day of employment and the option loses its ISO tax status, becoming an NSO instead. That means ordinary income tax on the spread at exercise rather than capital gains treatment later. Most plans peg the post-termination exercise window at exactly 90 days for this reason. If termination results from death or disability, the window extends to 12 months.1Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options
Fail to exercise within your window and vested options expire back to the company. This is where people lose real money. If you leave a startup holding vested ISOs with a large spread, you may face a painful choice: come up with the cash to exercise (and potentially trigger AMT), or walk away from equity you spent years earning.
Repurchase Rights on Vested Shares
At private companies, vesting isn’t always the end of the story. Many equity agreements include a right of repurchase allowing the company to buy back your vested shares at fair market value when you leave. This is standard in startup restricted stock purchase agreements and exists because private company shares have no public market. It gives the company control over its cap table while ensuring you receive fair value for what you earned.
How Vested Equity Is Taxed
Equity compensation creates tax events at specific moments, and the rules differ depending on which award you hold. Getting this wrong is one of the most expensive mistakes in equity compensation.
RSUs Are Taxed at Vesting
RSUs are straightforward. When shares vest and land in your account, the IRS treats their fair market value as ordinary income. Your employer withholds taxes at the federal supplemental wage rate of 22% for amounts up to $1 million, and 37% on anything above that threshold.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide State income taxes add another layer, with supplemental rates ranging roughly from 1.5% to over 11% depending on where you live.
The 22% federal withholding rate catches people off guard because it’s often less than their actual marginal tax rate. If you’re in the 32% or 35% bracket, you’ll owe additional tax when you file. Plan for the shortfall rather than treating the net shares that appear in your account as fully tax-paid.
RSUs are not eligible for a Section 83(b) election. The IRS treats an RSU grant as a promise to deliver shares in the future, not an actual transfer of property, so there’s nothing to elect on at the grant date.3Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens
Stock Options Are Taxed at Exercise
With stock options, the taxable event is exercise, not vesting. The two option types diverge sharply at that point.
NSOs generate ordinary income on the spread between your exercise price and the stock’s fair market value at exercise. If your exercise price is $2 and the stock is worth $20, you owe ordinary income tax on $18 per share immediately. Any further gain when you eventually sell is taxed as a capital gain.
ISOs receive preferential treatment. No regular income tax is due at exercise, but the spread counts as income for Alternative Minimum Tax purposes, which can produce an unexpected tax bill. To qualify for long-term capital gains rates on the full profit when you sell, you must hold the shares at least two years from the grant date and one year from the exercise date.1Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Sell before meeting both holding periods and the entire spread at exercise is reclassified as ordinary income.
The Section 83(b) Election
If you receive restricted stock (actual shares subject to vesting), you can file a Section 83(b) election within 30 days of the grant to pay taxes on the stock’s value at the time of transfer rather than waiting until it vests.4Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For early-stage startup employees receiving shares worth pennies, this can be a powerful move: you pay a small tax bill now and convert all future appreciation into capital gains rather than ordinary income.
The risk is real. If you leave before your shares vest and forfeit them, you cannot recover the taxes you already paid. The 30-day deadline is absolute and cannot be extended. Miss it and you’re locked into paying taxes at each tranche’s vesting value. The election applies only to restricted stock awards. RSUs and stock options are not eligible.3Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens
The AMT Trap on ISO Exercises
Exercising ISOs while holding the shares is the classic AMT trap. The spread between your exercise price and the stock’s fair market value counts as income under the AMT calculation even though it’s excluded from your regular tax return. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, with phase-outs beginning at $500,000 and $1,000,000 of AMT income respectively.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large ISO exercise can blow past those exemptions and create a tax bill on gains you haven’t actually realized in cash.
One way to avoid the AMT adjustment entirely is to exercise your ISOs and sell the shares in the same calendar year. This creates a disqualifying disposition. You lose the favorable capital gains treatment, but the AMT problem goes away and you have cash to cover the tax. Whether the trade-off makes sense depends on your overall tax situation and how much you believe the stock will appreciate.
Accelerated Vesting in an Acquisition
Accelerated vesting overrides the original schedule and moves ownership forward, usually when the company is acquired. Two structures dominate.
Single-Trigger Acceleration
A single-trigger clause accelerates some or all of your unvested equity the moment a change of control closes. No additional conditions. This protects early employees and executives by ensuring they capture the value of a transaction they helped create, regardless of whether the acquirer keeps them on.
Double-Trigger Acceleration
Double-trigger acceleration requires two events: a change of control plus an involuntary job loss. The second trigger is typically being terminated without cause or resigning for “good reason” within a defined window after the acquisition, commonly 6 to 12 months. “Good reason” usually covers a significant pay cut, a demotion, or being required to relocate beyond a specified distance (50 miles is a common threshold).
Double-trigger is more common than single-trigger because acquirers dislike buying companies where the entire team can cash out and walk away on closing day. From your perspective, double-trigger still provides meaningful protection: you only lose unvested equity if you voluntarily leave under conditions you’d find acceptable.