Startup Equity and How Your Options Vest

Startup companies often give their employees stock options as part of their compensation package. However, it’s likely you won’t be able to purchase that stock — a process known as “exercising your options” — immediately.

When you receive your stock options, your employer will also let you know the vesting schedule. This timeline determines when you’ll be eligible to exercise your stock, and it forms a key part of your equity compensation. Understanding how your stock options vest is important if you want to maximize your financial benefits, especially if you’re looking to sell your private shares on an investing platform like Mirai Capital.

Stock Option Vesting Schedules

Startups use stock option vesting schedules — also called “equity vesting schedules” — to encourage employees to stay with the company and help the business succeed over a period of time. Without vesting schedules, employees could exercise all their options right away and then leave the company.

The most common type of schedule is a four-year plan that includes a one-year “cliff.” With this setup, employees earn the right to 25% of their stock options after they’ve worked for the company for one full year. This first year is the “cliff.” After that, the other 75% of their options usually vest bit by bit over the next three years.

Understanding Cliff Vesting

Let’s look at a typical example:

• Year one (before the cliff): During your entire first year of working, you don’t yet own any of the stock options you were granted. You get nothing during this initial period, as none of your equity has vested.
• Hitting the cliff (end of year one): The day after you complete your first full year, you reach the cliff. At this time, 25% of your total stock options suddenly become yours — they vest immediately.
• After the cliff (years two, three, and four): The remaining 75% of your options don’t all come at once. Instead, they usually vest in small, equal parts — typically each month for the next three years. For instance, you might get 1/36th of the remaining shares each month.
• Full vesting (end of year four): By the end of the four years, 100% of your granted stock options will have vested, meaning they are all available to be potentially purchased (though you still have to exercise the stock).

Types of Vesting Schedule

Most startup equity vesting schedules include a cliff, but some plans might not — especially those offering restricted stock units (RSUs). In this instance, a certain percentage of the grant often vests every month or quarter, starting immediately or on a specific date. Similarly, executives who have more leverage might be able to negotiate a package where their options vest immediately or under a schedule that works better for them.

Sometimes, if a startup has a good working relationship with an employee and wants to keep them motivated, it might offer a bonus stock option grant during their tenure. This is also known as a “refresh grant,” and this equity generally starts vesting right away.

Instead of time, some companies tie vesting to specific goals. For example, a sales leader might get options that vest when the team hits a certain revenue target, or an engineer might vest options when a new product is successfully launched. This directly links earning options to performance or specific company achievements. Occasionally, a schedule might be hybrid, requiring both time served and milestones to be met.

Once Your Options Have Vested

After your stock has vested, you have earned the right (but not the requirement) to buy your shares in the company, which is called “exercising” your stock. You don’t need to wait for 100% of your options to vest in order to start exercising them. You also have a choice about whether to exercise all of your currently vested options, or just some of them.

Your options grant will lay out the “strike price” of buying your stock. This is the amount you’ll pay to purchase one share of your company when you exercise a stock option. This strike price won’t change, regardless of whether you exercise immediately or wait several years, or if the company’s value rises or falls.

If your company initially granted you 2,000 options, for example, you can now buy up to 2,000 shares at your strike price. Even if those shares are currently valued at $10, $50, or $100, you can still buy them at your original strike price.

Timelines to Exercise Stock

Most vested options have an expiry date, the length of which usually depends on whether you still work at the company.

If you’re a current startup employee, your vested options usually have an expiration date that’s far in the future. A common expiration period is 10 years from the date your options were originally granted (not from when they vested). As a result, you generally have a long time to decide if and when you want to buy the shares.

If you leave the company, that timeframe changes significantly. If you resign or are terminated, there’s usually a much shorter window to exercise any options that vested before your last day. This is called the post-termination exercise period (PTEP), and it’s commonly 90 days from your termination date. If you don’t exercise your vested options within this window, they will typically expire, and you’ll lose the right to buy those shares.

Remember: your options will only vest while you are working at the company. If you leave your job before they are fully vested, your vesting schedule will stop. Anything that’s vested is yours to keep, and you must exercise those options within your PTEP window. Anything that hasn’t vested will be returned to your company.

To understand the terms and conditions specific to your case, you need to read your stock option grant agreement carefully, or create an account on an investing platform like Mirai Capital, which deals with stock options and the private market, and can help you understand what your grant means. This document will tell you the exact expiration date of your options and the specific rules about how long you have to exercise them after leaving the company.

Selling Your Stock on Mirai Capital

Private stocks typically have low liquidity, which means they can’t be bought and sold with the same freedom as shares that trade in the public markets. However, once your stock options have vested, it might be possible to unlock the value of your shares by selling your shares on Mirai Capital, which is a unified platform for primary and secondary investment in the private market.

If you want to sell your stock, you must own it first — meaning the shares you’re hoping to sell must be fully vested and you need to have exercised your options. If you don’t have the money to exercise the stocks yourself (or you don’t want to), a buyer on Mirai Capital might offer to help pay the cost as part of the transaction when they’re buying your stock from you. Some companies will permit you to exercise your vested options and sell them at exactly the same time, which means you can effectively use the proceeds of sale to pay for the exercise cost.

If you aren’t sure whether your company permits this, reach out to us. Mirai Capital has relationships with, or intelligence about, thousands of private companies and can help you figure out the best course for you.