Vested equity is the portion of employer-granted stock or stock options that you fully own because you’ve satisfied the conditions attached to the grant, most commonly a requirement that you stay at the company for a set period. Once equity has vested, the company can no longer take it back if you quit, get laid off, or are fired. Anything still unvested is a conditional promise that disappears the day you leave.
How Equity Becomes Vested
When a company grants you equity compensation, the grant almost always comes with strings attached. The most common string is continued employment: you earn ownership of the shares gradually by staying on the job. The shares you haven’t yet earned are called unvested equity. They appear in your grant agreement, and your employer may track them in an online portal, but the company can reclaim them if you leave before the vesting conditions are met.
Once you satisfy those conditions, the equity becomes vested. At that point, the company can no longer reclaim it. You own it outright. That distinction between a conditional promise and genuine ownership is the core of vesting. Everything else — the schedules, the tax rules, the exercise windows — flows from it.
The Vesting Schedule in Your Grant Agreement
Your grant agreement includes a vesting schedule, which is the timeline dictating when equity converts from unvested to vested. Most schedules are time-based: the only requirement is that you keep working at the company for a specified duration.
Four Years With a One-Year Cliff
The most common arrangement in the technology industry is a four-year vesting schedule with a one-year cliff. The cliff means nothing vests during your first twelve months. If you leave before your one-year anniversary, you walk away with zero equity from that grant. Once you hit the one-year mark, 25% of your total grant vests at once. The remaining 75% then vests in equal monthly or quarterly installments over the next three years, often 1/48th of the total grant each month.
The cliff exists because onboarding a new employee is expensive, and the company wants assurance you’ll stay for at least a year before it begins transferring ownership. From your side, the cliff is the highest-stakes phase of the schedule.
Performance and Double-Trigger Variants
Not all vesting is purely time-based. Some grants tie vesting to specific targets like revenue milestones, product launches, or individual performance metrics. These performance-based schedules are more common in executive packages and carry additional uncertainty because the outcome depends on more than just showing up.
A variation called double-trigger vesting requires two conditions to be met together, typically a change-of-control event such as an acquisition combined with a service condition. Double-trigger provisions matter most during mergers.
The Common Forms of Vesting Equity
What “vested” means in practice depends on the type of equity you hold. The three forms you’re most likely to encounter are RSUs, stock options, and restricted stock awards.
Restricted Stock Units
Restricted Stock Units (RSUs) are a promise to deliver actual shares of company stock on a future date. You don’t own anything until the vesting date arrives. When an RSU vests, the company deposits shares into your brokerage account, and the fair market value of those shares on that date counts as ordinary income. Under federal tax law, property received for services is taxable when it’s no longer subject to a risk of forfeiture, which for RSUs is the vesting date.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
RSUs are popular at large public companies because they’re straightforward: you pay nothing to receive the shares, and their value tracks the stock price. You also have no control over the tax timing. You owe income tax when the shares vest whether or not you sell them.
Stock Options: ISOs and NSOs
Stock options give you the right to buy shares at a fixed price called the strike price, usually set at the stock’s fair market value on the grant date. If the stock price rises above your strike price, the difference is your profit. If the stock never exceeds the strike price, the options are worthless whether they’ve vested or not.
Options come in two flavors. Incentive Stock Options (ISOs) are available only to employees and carry preferential tax treatment; you generally owe no regular income tax when you vest or exercise them. Non-Qualified Stock Options (NSOs) can be granted to employees, contractors, or directors, and the spread between the stock price and the exercise price is taxed as ordinary income the moment you exercise.2Internal Revenue Service. Topic No. 427, Stock Options
Restricted Stock Awards and the 83(b) Election
Restricted Stock Awards (RSAs) differ from RSUs in one fundamental way: you receive actual shares immediately, often at a very low price. The company retains the right to buy those shares back at your purchase price if you leave before they vest. As each tranche vests, the repurchase right drops away and you own those shares free and clear.
RSAs open the door to the Section 83(b) election. By filing it, you choose to pay ordinary income tax on the shares’ value at the time of grant, before they appreciate, rather than on the higher value at each vesting date. If the stock climbs substantially, this front-loads a small tax bill and converts future appreciation into capital gains, which are taxed at lower rates.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
The deadline is strict. You must file the election within 30 days of receiving the shares. There are no extensions. If the 30th day falls on a weekend or federal holiday, the deadline shifts to the next business day, but that’s the only flexibility.3Internal Revenue Service. Instructions for Form 15620, Section 83(b) Election Miss it, and you’ll be taxed on the full fair market value at each vesting date, exactly the outcome the election was designed to avoid. The other risk is that if you leave before vesting and the company repurchases your unvested shares, you don’t get a refund on the taxes you already paid.
Taxes When Equity Vests
Tax obligations depend on the type of equity and on when you act. Getting the timing wrong can cost tens of thousands of dollars on a single grant.
RSUs
When RSUs vest, the full fair market value of the delivered shares is treated as ordinary income for the year. Your employer withholds federal income tax, Social Security, and Medicare from the proceeds, typically by selling a portion of the shares before depositing the rest in your account. The income and withholding appear on your W-2. Your cost basis is the fair market value on the vesting date, so selling immediately produces little or no additional gain or loss.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
NSOs
Vesting an NSO doesn’t trigger a tax bill by itself. The taxable event happens when you exercise. The spread between the market value at exercise and the strike price is taxed as ordinary income, and your employer withholds income tax, Social Security, and Medicare on it.2Internal Revenue Service. Topic No. 427, Stock Options Your cost basis becomes the market value at exercise, and any later gain or loss is treated as a capital gain or loss.
ISOs and the AMT Trap
ISOs get more favorable treatment: you generally owe no regular federal income tax when you exercise. But the spread at exercise counts as an adjustment for the Alternative Minimum Tax (AMT), so exercising a large block of ISOs in a single year can trigger a separate AMT liability that catches many employees off guard.2Internal Revenue Service. Topic No. 427, Stock Options Running the numbers through a tax projection before exercising is the only way to avoid a surprise bill.
To keep the preferential ISO treatment, you must hold the shares for at least two years from the grant date and at least one year from the exercise date. Selling before either period expires is a disqualifying disposition, and the spread then gets taxed as ordinary income, the same as if the options had been NSOs all along.4Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options
Capital Gains When You Sell
Once you own shares, whether from RSUs, exercised options, or RSAs, any gain between your cost basis and the sale price is a capital gain. If you held the shares for more than one year after the taxable event that established your basis, the gain qualifies for the long-term capital gains rate, which is significantly lower than ordinary income rates for most people. If you held for one year or less, the gain is short-term and taxed at your ordinary income rate.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
What Happens to Vested Equity When You Leave
The rules diverge sharply depending on whether your equity has vested when you walk out the door.
Unvested Equity Is Forfeited
Unvested shares and options are almost always forfeited immediately on termination, regardless of why you’re leaving. This is the core retention mechanism of vesting. Resign or get laid off two years into a four-year schedule, and you keep what has vested and lose the rest. There’s generally no compensation owed for the unvested portion.
Vested Shares Are Yours
Vested RSUs and RSAs are your property. The shares sit in your brokerage account, and your former employer has no claim to them. If the company is publicly traded, you can sell on the open market, subject to any insider trading restrictions that may still apply during a post-employment cooling-off period.
Vested Options Expire on a Deadline
Vested stock options require you to act quickly after leaving. Your grant agreement will specify a post-termination exercise period (PTEP), the window during which you can exercise your vested options by paying the strike price. A majority of companies set this at 90 days, though some tie the length to tenure or offer extended windows. If you don’t exercise within the PTEP, your vested options expire worthless, even if they were deep in the money.
For ISOs, the deadline carries an additional sting. To preserve ISO tax treatment, you must exercise within three months of your last day of employment. Wait longer, and the options automatically convert to NSOs, which means the spread at exercise gets taxed as ordinary income with full payroll tax withholding. If you’re disabled within the meaning of the tax code, the three-month window extends to one year.4Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Either way, exercising vested options after departure often requires coming up with cash to pay the strike price, potentially a large amount, within a tight timeframe. This is the deadline departing employees are most likely to miss.
What Happens to Vested Equity in an Acquisition
When your company gets acquired, what happens to your unvested equity depends on the acceleration provisions in your grant agreement.
Single-trigger acceleration vests some or all of your unvested equity the moment the acquisition closes. You don’t need to be terminated or meet any additional condition. From an employee’s standpoint, single-trigger is the most favorable arrangement. Acquirers tend to dislike it because it removes the financial incentive for key employees to stay after closing, which is why single-trigger provisions have become less common for rank-and-file grants.
Double-trigger acceleration requires two events: the company must be sold, and you must then be terminated without cause or resign for “good reason” such as a significant pay cut, forced relocation, or major downgrade in responsibilities. Most double-trigger agreements require the termination to occur within 9 to 18 months after the deal closes.
If your agreement has no acceleration provision, the acquirer typically either assumes your unvested equity, converting it into equivalent equity in the new company on the same schedule, or cancels it outright, sometimes with a cash payout. Read your grant agreement. If you’re negotiating an offer with equity, this is the clause worth spending time on.
Vested Doesn’t Always Mean Sellable
Owning vested shares in a private company is not the same as owning shares you can sell. Private company stock almost always comes with transfer restrictions written into the stockholders’ agreement or the original purchase agreement. The most common restriction is a right of first refusal (ROFR), which requires you to offer your shares to the company or existing shareholders before selling to anyone else, on the same terms the outside buyer offered. The practical effect is to delay any sale and give the company veto power over who becomes a shareholder.
Beyond the ROFR, many private companies require board approval for any stock transfer, and some outright prohibit sales until a liquidity event like an IPO or acquisition. Vested equity can be genuinely valuable on paper but entirely illiquid for years. Secondary marketplaces exist for shares of some well-known private companies, but access is limited and typically requires company consent. When weighing a job offer with private company equity, factor in the possibility that you won’t be able to convert those shares to cash for a long time, regardless of how much they’ve appreciated.