Vesting
Vesting refers to the process by which an employee or other beneficiary gains ownership rights to a benefit, such as stock options, retirement funds, or intellectual property, over a period of time. This process is often tied to continued employment or the fulfillment of specific conditions, encouraging long-term commitment. Upon complete vesting, the beneficiary has full control and ownership of the asset or benefit. Early termination of the relationship usually voids the non-vested portion. vesting schedules differ greatly depending on company policy and benefit type, and are determined during the outset of any agreement.
Vesting meaning with examples
- Sarah’s stock options had a four-year vesting schedule, meaning she gained ownership of a portion of her options each year. After three years of dedicated work, she received 75% of her granted options, further incentivizing her for retention. If she had left after two years, she would have only been vested in 50%. Her continued dedication resulted in gaining full ownership and control over her vested options.
- The company's 401(k) plan had a vesting period of five years. After 5 years of employment, John would have full ownership of the employer matching contributions. For the first two years, no portion was vested. After 3 years, he was 60% vested. After 5 years, John was fully vested in all the employer contributions, providing him with a secure retirement plan.
- The founders of the startup agreed on a vesting schedule for their intellectual property rights. Each founder would gain ownership of their assigned share of the IP over a period of three years. The vesting was designed to keep the team together to achieve a mutual goal. Upon the successful release of their new project, the team would be fully vested.
- A real estate investor purchased a property and agreed to transfer the ownership to the current tenant over time via a vesting agreement. The tenant would have full rights after 10 years, provided they made all agreed upon payments. Each year, a percentage of the property rights would be transferred to the tenant, based upon the agreement made at the outset.
