Vesting: how people earn (or lose) their shares
In many financial incentive plans such as VSOPs and ESOPs it is very common to use vesting as a mechanism that decides how (virtual) shares are earned over time or performance. You set the speed, the pace, and the rules.
Key facts about vesting
- Definition: Gradually earning the right to shares, options, SARs, or virtual shares.
- Typical schedule: 4 years total with a 12-month cliff, then monthly vesting.
- Types: time-based, milestone-based, event-based, or a hybrid.
- Special cases: cliff, accelerated vesting, vesting pause, unvesting, good leaver, bad leaver.
Vested vs unvested units
Vesting moves units from the unvested jar to the vested jar as time, milestones, or KPIs are met.
- Unvested: Shares reserved for the participant, but only earned over time or by KPIs.
- Vested: Shares the participant has already earned and can keep.
What is vesting?
Vesting is the process by which a participant gradually becomes entitled to a granted allocation of shares, options, SARs, or virtual shares. On the grant date, the allocation is promised. On each vesting date, a slice of it becomes earned and therefore 'vested'. If the participant leaves before the schedule is complete, the unvested portion is forfeited.
The whole point is behavioural: an incentive that is handed over on day one is quickly seen as salary. A vested incentive stays connected to a decision, a milestone, or continued contribution. Vesting is what keeps a share-based reward from being taken for granted.
Why companies use vesting
Four reasons show up in almost every plan we help design.
Retention. A cliff plus a multi-year schedule gives people a concrete reason to stay through the hardest phases of growth.
Alignment. Rewards land at the moments that matter: after a full year, on milestones, or at exit. Behaviour follows the payout timing.
Protection. If someone leaves early or underperforms, the unvested portion is recycled into the pool. No dead equity on the cap table.
Fairness. New joiners, part-time contributors and long-tenure staff can be treated proportionally. The schedule reflects real contribution.
Choose the type that fits the goals
Most Sharesquare plans combine time-based vesting as the backbone with milestone-based top-ups for specific goals. The interactive chart further down shows the time-based curve; milestones are typically layered on as extra grants.
How participants can earn and lose
At any moment, a participant's virtual share units (VSUs) sit in exactly one of these six states. Click a state to see the mechanism in action and a typical situation that triggers it.
How participants can earn and lose their shares
- Lapse: Participant loses all For example, a participant leaves within the cliff period or he or she leaves the company as a 'bad leaver'. In that case, the allocation lapses and no units remain. The person leaves the plan without a payout.
- Unvesting: Participant gradually loses For example, a participant is dismissed for cause and becomes a "bad leaver" under the plan rules. In reverse vesting or unvesting, the allocation starts at 100% and falls back over an agreed period, so units the participant already held are taken back step by step instead of all at once.
- Vesting stop: The count remains fixed. For example, a participant resigns after the cliff; already-vested units stay, but no new units are earned. This is a normal exit: the schedule simply stops at the current vested count. A "good leaver" (death, disability, mutual termination) is often treated the same way or with partial acceleration.
- Vesting pause: No gain nor lose For example, a participant takes sabbatical or is generally absent for a longer perdiod. In that case vesting can be frozen until they return. A pause works like the cliff period: no new units are earned for the duration, and the end date shifts by the length of the absence.
- Vesting: Participant gains For example, a participant hits a 12-month milestone and meets a revenue KPI, so the next slice becomes earned. Time-based vesting depends on continued service; milestone-based vesting depends on hitting specific KPIs. Most plans use time as the backbone and add milestone top-ups.
- Accelerated vesting: Participant gains all For example, the company is acquired before the participant's schedule ends, triggering immediate full vesting. This does not need to be set upfront; the company can decide to accelerate a grant at any point in time.
Vesting schedules you will actually see
| Profile | Duration | Cliff | Purpose |
|---|---|---|---|
| Acquisition grant | 4 years | 24 months | Atttract talented candidates but keep it low-risk if they don't stay |
| Loyalty grant | 5 years | 0 to 12 months | Encourage valuable employees to stay as long as possible |
| Performance grant | 1 to 3 years | Milestone-based | Reward employees for achieving specific targets |
See cliff, pause and acceleration on a real schedule
Change the duration and the cliff to see how the vesting curve shifts.
Then trigger an acceleration, which vests 100% at once, or a pause, which freezes vesting for 3 months and moves the end date back.
Vesting is one layer. Here is the rest.
Vesting decides how someone earns the incentive. What they earn is defined by the incentive type.
Reward participants for value growth without issuing shares.
Stock Appreciation Rights
Reward participants for value growth without issuing shares.
Annual cash payout tied to profit or dividend.
Virtual dividend & profit sharing
Annual cash payout tied to profit or dividend.
The umbrella concept that ties SARs, virtual dividend and vesting together.
Virtual shares (full explainer)
The umbrella concept that ties SARs, virtual dividend and vesting together.
Frequently asked questions
What is vesting in simple terms?
+
Vesting is the mechanism by which someone gradually earns the right to shares, virtual shares, or another incentive. Instead of getting everything on day one, the participant unlocks their allocation over time or after hitting certain milestones. If they leave before the schedule is complete, they typically forfeit the unvested portion.
What is a cliff in vesting?
+
A cliff is a minimum service period. Before the cliff, 0% is vested. When the cliff is reached, a chunk of the allocation vests at once (for example, 25% after a 12-month cliff on a 4-year schedule). After that, vesting continues linearly.
What is accelerated vesting?
+
Accelerated vesting means the schedule is compressed or fully triggered by a specific event, most commonly a change of control (exit, acquisition, IPO). Single-trigger acceleration fires on the event itself; double-trigger requires both the event and a termination. It is not standard: most plans do not accelerate automatically, because a buyer wants the team to stay after closing.
What happens on a good leaver vs bad leaver?
+
A good leaver (death, disability, mutual termination, retirement) typically keeps the vested portion and sometimes receives partial acceleration. A bad leaver (voluntary resignation before a cutoff, dismissal for cause) usually forfeits everything, including the vested portion in some plans. Tie the leaver categories to the formal termination ground, so the label holds up if it is challenged.
Does vesting apply to virtual shares and SARs?
+
Yes. Vesting is the earn-in mechanism for any share-based incentive: real shares, options, SARs, virtual shares, or profit-sharing units. Sharesquare lets you configure schedules per participant and per grant type.
Does vesting continue during long-term sickness?
+
It depends on your plan, but in the Netherlands you should be careful. An employee on sick leave stays employed and keeps the right to salary. Stopping vesting during sickness touches an employment condition and can be seen as disadvantaging that employee. Many Dutch plans therefore let vesting continue during sickness and only pause it for unpaid leave or a sabbatical.
What happens when someone is fully vested?
+
Once everything is vested, the retention effect of the grant fades: leaving no longer costs anything. Many companies plan a refresh grant for key people before that moment, a new grant with its own vesting schedule, so there is always something still to earn.
How big should the pool be?
+
Size it for the people you will hire until your next milestone, not only for the current team. A pool that is too small forces awkward renegotiations later. With virtual shares the pool does not change the cap table, so expanding it is a board decision rather than a shareholder process.