Vested stock is company equity you fully own because you have met the conditions in your grant agreement, usually a period of continued employment. Before those conditions are satisfied, the equity is unvested and the company can take it back if you leave. Once it vests, it belongs to you, and the rules that matter next are about taxes, timing, and what happens if you change jobs.
How Vesting Actually Works
When a company grants you equity, it does not hand you shares you can sell that day. The grant is a promise: you will receive ownership of a set number of shares, or the right to buy them, once you satisfy specific conditions. Until then, you hold a contingent interest, and you can lose it.
Once the conditions are met, the equity shifts from promised to owned. The shares, or the right to buy them, cannot be clawed back simply because you leave. That transition is what vesting means. Everything else, from schedules to taxes, follows from it.
Common Vesting Schedules
Most equity agreements are time-based. The typical structure is a four-year schedule with a one-year cliff. Nothing vests during the first twelve months; if you leave inside that year, you walk away with nothing from the grant. At the one-year mark, a chunk vests all at once, usually 25 percent. The remaining shares then vest in smaller increments, often 1/48th of the grant each month for the next three years.
Not every company uses this exact pattern. Some run three-year or five-year schedules. Some skip the cliff and vest quarterly or annually from day one. The specific terms are always in the equity agreement you signed.
Some grants use performance-based vesting instead of, or in addition to, time. The trigger might be a revenue or profitability threshold, an IPO or other liquidity event, or a target company valuation. Performance vesting shows up most often in executive packages and pre-IPO startups that want to tie equity to specific business outcomes.
The Three Types of Equity That Vest
Vesting works the same way in concept across equity types, but what you actually receive when it vests is different.
Restricted Stock Units
An RSU is a promise to deliver actual shares once vesting conditions are met. You pay nothing to receive them. When the RSU vests, the company deposits shares, or their cash equivalent, into your brokerage account, and you become a shareholder at that point.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
Incentive Stock Options
An ISO gives you the right to buy company stock at a fixed strike price. Vesting makes the option exercisable; you still have to pay the strike price to actually acquire the shares. ISOs can only be granted to employees, and the strike price must be at least the stock’s fair market value on the grant date. If the total value of ISOs becoming exercisable for the first time in a single calendar year exceeds $100,000, the excess is reclassified and taxed as non-qualified options.2Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options
Non-Qualified Stock Options
NSOs work mechanically like ISOs. You pay a strike price to buy shares once the option has vested. NSOs can be granted to employees, consultants, advisors, or board members, and they do not carry the special tax treatment ISOs get.3Internal Revenue Service. Topic No. 427, Stock Options
Taxes When Your Equity Vests
Taxes are usually the most consequential piece, and the rules split three ways.
RSUs
When RSUs vest and shares are delivered, the full fair market value of those shares is ordinary income, just like salary. Your employer reports it on your W-2 and typically withholds by selling some of the delivered shares to cover the bill. Any gain or loss when you later sell is a capital gain or loss, measured from the price on the delivery date.
ISOs
ISOs get favorable treatment if you meet two holding periods: at least two years after the grant date and at least one year after exercising.2Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Meet both, and any profit at sale is taxed at the long-term capital gains rate, with no regular income tax at exercise.4Office of the Law Revision Counsel. 26 USC 421 – General Rules
There is a catch. Exercising ISOs does not trigger regular income tax, but the spread between your strike price and the stock’s fair market value at exercise is added to your income for the Alternative Minimum Tax. If that spread is large, you could owe AMT in the year you exercise. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, with phaseouts beginning at $500,000 and $1,000,000 respectively.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Sell before meeting both holding periods and you have a disqualifying disposition. The spread at exercise is reclassified as ordinary income, much like an NSO.4Office of the Law Revision Counsel. 26 USC 421 – General Rules
NSOs
NSOs are simpler and less tax-advantaged. When you exercise, the spread between the strike price and the stock’s current fair market value is taxed as ordinary income and reported on your W-2, or a 1099 if you are not an employee. There is no special holding-period benefit. Any additional gain or loss when you later sell is a capital gain or loss.3Internal Revenue Service. Topic No. 427, Stock Options
The 83(b) Election, if It Applies to You
This one is worth flagging because people confuse it with vesting generally. A Section 83(b) election is only available if you receive actual shares of restricted stock, not RSUs and not options. Under the default rule, you owe tax when the stock vests, on the fair market value at that later date.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services The 83(b) election flips that: you pay tax on the value at the time the stock is transferred to you, before it vests.
This is most useful at early-stage startups, where current value may be very low. If the company grows during your vesting period, you have already paid tax on the lower number, and future appreciation is taxed at capital gains rates when you eventually sell. The risk is that if you leave before vesting and forfeit the shares, you cannot recover the tax you paid.
The deadline is strict and irrevocable. You must file the election with the IRS within 30 days of receiving the stock. No extension. The IRS provides Form 15620.6Internal Revenue Service. Form 15620 Instructions for Section 83(b) Election
What Happens to Vested Stock When You Leave
Leaving triggers different results depending on what vested and what did not.
Unvested equity. Any unvested RSUs, options, or restricted stock are typically forfeited the day your employment ends. The shares go back to the company’s equity pool. This holds whether you quit, are laid off, or are terminated for cause, unless your agreement has an acceleration provision that fires on your departure.
Vested RSUs and restricted stock. Shares already delivered to your brokerage account are yours. Employment status does not affect stock you already own. If the company is still private, transfer restrictions may limit your ability to sell. After an IPO, a lock-up period, typically 90 to 180 days, can also block insiders from selling even vested shares.
Vested stock options. This is where people lose money by accident. Most plans give you 90 days from your last day to exercise vested options by paying the strike price. Miss that window and the options expire and are permanently canceled, even though they were fully vested.
ISO holders have an extra wrinkle. Federal tax law requires you to have been an employee within the three months before exercising for the option to keep ISO tax treatment.2Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options If your company offers an extended exercise window beyond 90 days, and some now offer several years, any exercise after the three-month mark converts the ISO into an NSO for tax purposes. The spread at exercise becomes ordinary income rather than a potential long-term capital gain.
Some agreements extend the exercise window to 12 months for disability or death. The specific terms are in your plan documents, so read them before your last day.
Acceleration and Clawback
Two provisions can change the picture after the fact, one in your favor and one against.
Acceleration provisions speed up vesting when major corporate events occur. Single-trigger acceleration vests all or part of your unvested equity when one event happens, usually an acquisition or merger, regardless of whether you keep your job. Double-trigger acceleration requires two events: a change of control, plus your involuntary termination without cause or, in many agreements, your resignation for good reason. Good reason typically covers a significant pay cut, a material reduction in responsibilities, or a forced relocation, and most agreements require you to notify the company within a set window and give it a chance to fix the issue. Double-trigger is more common than single-trigger.
Clawback works the other direction. SEC rules require publicly traded companies to maintain clawback policies that can recover incentive-based compensation, including vested equity awards, from executive officers if the company restates its financials. The amount subject to recovery is the portion that exceeds what would have been earned under the corrected numbers. Companies have very limited discretion to waive recovery, and there is no small-amount exception. Individual employment or equity agreements may add their own clawback triggers, such as a termination for cause, violation of non-compete or non-solicitation terms, or misconduct discovered after departure. The only way to know what applies to you is to read the equity agreement in full.