Entrepreneurs should embrace the term “vesting” more than intimidating phrases such as “pre-money valuation” or “anti-dilution adjustments.” Vesting is a form of investing that gives the investor choices in the form of stock options. Here are more details on the benefits of vesting.
Vesting Option Shares
Vesting involves an employee or contractor purchasing a company stock option that is exercised over a specified time frame. The investor will have this option available as long as he or she remains a part of the company. When the optionee is given an option to purchase company stock and the amount of option shares are exercised, the transaction is considered vesting.
Normally, 1/48 of the shares that are issued in an option each month are vested until all shares are vested over a 48 month period of the optionee rendering services to the company.
When the vested portion of stock is exercised, which means the shares are purchased, the purchase price becomes the exercise price. When the transaction becomes available in exchange for services rendered by the investor, the option shares are called “sweat equity.”
Immediate Exercise of Stock Options
In some cases, the optionee may need to exercise stock options immediately. The company reserves the right to buy back the option share lapses if the employee has a commitment to render its services. This type of transaction is known as “reverse vesting,” which can also refer to stock distribution through other options. If you are purchasing shares and will be involved with reverse vesting, you may consider filing an 83(b) election.