Stock vesting, explained

You just got an offer from a startup. The salary looks decent, the team seems smart, and there’s equity.

Then you open the offer letter and see this:

“You’ll receive 10,000 stock options, vesting over four years with a one-year cliff.”

Cool? Confusing? Both?

This guide explains what vesting means, plus how stock vesting works, what to watch out for, and what to do if you want that equity to turn into something more than just a bullet point on your resume.

What does “Vesting” mean?

Let’s start with the basics.

Vesting is the process of earning your rights to something valuable over time, usually equity or retirement benefits. When someone says “you’re vested,” it means you officially own something that was previously conditional.

Vesting definition: The schedule by which you earn ownership of employer-provided stock, options, or retirement contributions.

If companies handed out equity on Day 1, employees could quit on Day 2 and walk away with a significant amount of valuable stock.

So instead, companies use vesting schedules to:

• Encourage retention
• Align incentives
• Protect themselves from short-tenured hires

Whether you’re getting options, RSUs, or 401(k) contributions, vesting periods act like a timer. Stick around long enough, and you’ll be fully vested. Leave early, and you forfeit whatever hasn’t vested yet.

How stock vesting works

There are two common types of vesting structures:

1. Time-based vesting (The default setup)

Under a typical 4-year vesting schedule with a 1-year cliff:

• You earn 25% of your equity at the end of Year 1.
• After that, the remaining 75% vests in equal monthly installments over the next 36 months (1/48th each month).

Example:

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This type of vesting schedule incentivizes you to stick around. If you leave before your cliff date, you typically walk away with nothing. After that, what’s vested is yours to keep, even if you leave.

2. Milestone-based or hybrid vesting

In some cases, especially with RSUs at private companies, you need more than time. You also need a liquidity event, like an IPO or acquisition. That’s called double-trigger vesting.

You might have:

• Time-vested RSUs that don’t settle (aka become yours) until the company exits
• “Must be employed at exit” clauses that kill your equity if you leave too early

Vested vs. not vested doesn’t always mean what you think it means. You can be time-vested, but still get nothing if the second trigger doesn’t hit.

Vesting and leaving a company

Let’s say you’re 60% through your vesting schedule and thinking about jumping ship.

If you’ve got stock options:

• You usually keep your vested options (aka vested investment meaning)
• But you’ll have a limited time to exercise them (often 90 days)
• If you don’t exercise, they expire

If you’ve got RSUs:

• Single-trigger RSUs: You likely keep what’s vested
• Double-trigger RSUs: You usually keep the right to your time-vested shares, but you can’t access them until the company hits the second trigger, like an IPO or acquisition.

Vesting rights and requirements vary widely—read your grant docs carefully, or use Prospect to model your specific situation.

Vesting and retirement plans

Outside of startup equity, you’ll see vesting in 401(k)s and other retirement accounts.

Key point: Your own contributions are always fully vested. But employer matches? Not always.

You might have:

• A cliff vesting plan where you get 100% after 3 years
• A graded vesting plan where you get 20% per year over 5 years

Vesting means you don’t fully own the match until you’ve put in your time.

When someone says they’re “fully vested,” here’s what they mean:

• They’ve met all the time-based (and possibly milestone-based) requirements
• They now own 100% of what was promised
• They can exercise or sell (if a liquidity event exists)

Vested value means the portion of your equity or benefits that you can actually use, sell, or cash out.

Common mistakes and how to avoid them

Here are a few traps to avoid when it comes to vesting:

Mistake 1: Thinking “granted” means “yours”
Just because you were granted 10,000 shares doesn’t mean you’ll walk away with 10,000 shares. Vesting is the gateway.

Mistake 2: Forgetting about cliffs
If you leave at month 11 of a 12-month cliff, you get zero. Don’t assume you’re earning anything before the cliff hits.

Mistake 3: Overlooking settlement clauses
Some RSUs don’t convert to shares until a liquidity event like an IPO or acquisition. If you’re not employed when that happens, you might get nothing.

Mistake 4: Not planning for taxes
Vested money is not tax-free. Whether it's RSUs settling or options being exercised, Uncle Sam wants a cut.

FAQs: Rapid fire vesting questions

Q: What does “3-year vesting” mean?
A: You’ll be fully vested after three years. If you leave early, you get a prorated amount (unless there’s a cliff).

Q: What is a vesting day?
A: The exact date when a chunk of your stock vests and becomes yours.

Q: Do RSUs get forfeited if you leave?
A: If they’re not fully vested, yes—they’re typically forfeited. But if you’re time-vested and just waiting on a liquidity event, you’ll often still receive them once that second trigger happens.

Q: What are vesting rights?
A: Your contractual rights to own the shares or benefits after meeting the vesting conditions.

Q: What is a company vesting plan?
A: The employer’s defined structure for how and when equity or benefits vest.

Why this matters if you’re at a startup 

If you’re at a company like Anduril or Anrok, understanding vesting is non-negotiable.

• At Anduril, we estimate a >50% chance of a $50B+ exit
• That could make your unvested equity life-changing—if you’re still there when it hits

Use Prospect to run detailed scenario models on your equity: how much it could be worth, what happens if you leave early, and what to consider during tender offers.

“Vesting period” ≠ payday. “Vested shares” ≠ liquid. Understand the difference, or you could lose real money.

The bottom line

Vesting isn’t a footnote, it’s the fine print that decides whether your startup equity turns into real wealth or just wishful thinking.

Whether you’re trying to decode your offer letter, time your exit, or decide whether to sell in a tender offer, understanding vesting is the foundation.

Let Prospect help you make the most of it.