What is vesting period of an employee stock option plan (ESOP)?

Andy Lau has substantial experience representing pe/vc funds, investment banks and startup and growth companies in pe/vc investments, M&A, IPO and capital markets transactions. For a preliminary consultation, please email him at andy@askventure.com.

This article discusses what vesting period is in the context of employee stock option plan (ESOP) – something that a company needs to decide when adopting an ESOP or when granting options under an ESOP. I will also set out different examples of vesting periods.

What is vesting period?

Vesting period refers to the minimum period for which an option must be held before it can be exercised. It is possible that a company issues options that are not subject to any vesting period. This is something for the company to decide.

What is the purpose of a having a vesting period?

A vesting period allows the company to provide incentives to the grantees of an option to remain employed with the company during such period. This is because a grantee cannot exercise its option until the vesting period has passed. This allows the company to benefit from the continued service of the grantee during the vesting period and to retain talents within the company.

When does a company need to decide on the vesting period of an option?

1. When it adopts the ESOP. In this case, the terms of the ESOP should specify the vesting period.

or

2. When it grants the option. In this case, the ESOP may contain a clause stating that: ”the company may specify any minimum period(s) for which an option must be held before it can be exercised.”

Examples of vesting periods

Below are examples of vesting periods. A company may determine the vesting period as it wishes.

Example A

None (i.e., no vesting period)

Example B

Options will vest in equal portions on January 1, 2010, 2011, 2012, 2013, respectively, and will only become exercisable for a period from the respective dates and ending on [expiry date of the option scheme].

Example C

- up to 40% of the shares that are subject to the option so granted to him/her (rounded down to the nearest whole number) at any time during the period commencing from the 1st anniversary of the date of grant and ending on the 2nd anniversary of the date of grant

- up to 70% of the shares that are subject to the option so granted to him/her less the number of shares in respect of which the option has been exercised (rounded down to the nearest whole number) at any time during the period commencing from the 2nd anniversary of the date of grant and ending on the 3rd anniversary of the date of grant

- such number of shares that are subject to the option so granted to him/her less the number of shares in respect of which the option has been exercised (rounded down to the nearest whole number) at any time during the period commencing from the 3rd anniversary of the date of grant and ending on the expiry of the option period

Related posts:

1. What is Employee Stock Option Plan, ESOP, fully diluted shares?
2. Exercise price of share option under a share option scheme of a Hong Kong listed company
3. Pre-money, Post-money Valuation and Calculation in a Venture Capital Investment
4. Lock-up restrictions on controlling shareholders following a Hong Kong Stock Exchange (HKEx) IPO
5. Risky but High Potential Return Nature of Venture Capital Investments

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