Companies seeking to attract new talent will often entice potential hires with not just a competitive salary, but a stock option plan as well. But new employees often can't get their hands on those shares right away. Sometimes, it's because the company has not yet gone public, but even public companies tend to impose vesting schedules to ensure that they get good value out of their employees.
A vesting schedule is the process by which an employee earns the right to his or her shares of stock (or stock options) over time. Typically, if you remain employed for the duration of your vesting period, you'll get to collect your reward in full. Sometimes, however, companies will choose to accelerate a vesting schedule so that employees can get their hands on their assets sooner. But while that's a move that can benefit employees, it can be a dangerous one for companies.
How vesting schedules work
Vesting schedules are designed to incentivize employees and ensure that companies get good value out of the people they hire. Say you're given a vesting schedule upon getting hired for a certain number of shares over a four-year period of time. If you stay with the company for four years, you'll get your shares in full, but if you leave before your vesting period comes to a close, you'll forfeit some (or in certain cases, all) of your shares.
Why wouldn't the company that hires you just give you those shares up front? It's simple. Your company wants to make sure you not only stick around for the long haul, but perform your best. If you have a lot to gain financially by collecting those shares down the line, you'll be more motivated to not only stay with your company, but do your job well enough to avoid getting let go.
Sometimes, a company might choose to shorten a vesting period to allow employees to gain access to their shares or stock options more quickly. This is known as accelerated vesting.
Accelerated vesting typically comes into play when companies go through an acquisition or IPO. Say you're at the exact midpoint of a four-year vesting schedule, and your company enters into a deal wherein it's set to be acquired in six months. Your company might offer an acceleration that allows you to be fully vested once the acquisition is complete, even though you'd still have 18 months left on your original vesting schedule. A company might do this to entice you to stay on board once the acquisition goes through.
Companies sometimes offer accelerated vesting provisions that are triggered once certain goals are met. For example, if a company is looking to go public, it might offer accelerated vesting to key players once it files its IPO.
While accelerated vesting can be quite beneficial to employees, it can be a precarious move for employers. Once an employee gets his or her fully vested reward, he or she will have less incentive to stick around if a better offer comes along. Furthermore, in certain situations, accelerating a vesting schedule could have accounting implications that will need to be addressed (such as with stock options where the exercise price differs from that of the stock's fair market value). It's important to consider both the benefits and drawbacks of accelerated vesting from a company perspective, because while those on the receiving end typically have everything to gain, companies have the potential to lose.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at email@example.com. Thanks -- and Fool on!