Unvested Shares: What They Are and How They Work

This question causes a lot of confusion. The confusion likely stems from a misunderstanding of how vesting actually works.

How Vesting Actually Works

Vesting refers to the process by which employees earn shares over time. While it may seem like employees earn a certain number of shares for every month they work, this isn’t technically how vesting works.

Here’s how it really works. When a company grants stock (not options), it’s usually done through a restricted stock purchase agreement (RSPA). The company issues 100% of the stock grant, but one of the restrictions on the stock is that the company has the right to repurchase a certain portion of the stock if the employee is terminated. The repurchase right lapses for a portion of that stock every month.

For instance, let’s say our startup Gregarious Games Inc. grants Kiera 48,000 shares of stock on a four-year vesting schedule (assuming no cliff for this example). She is granted all 48,000 shares on the date of the grant. However, on that date, the company has the right to repurchase all 48,000 of the shares. Every month, the company loses the right to repurchase 1,000 shares (1/48th of the total shares). After 12 months, they can only repurchase 36,000 shares. After 48 months, they have lost the right to repurchase any shares. Note that Kiera has owned all 48,000 shares from the date of the grant.

For more information on stock grants, click here.

Unvested Shares Can Vote

Kiera owns the shares, which gives her all the rights and privileges afforded to shareholders, including voting. Yes, even unvested shares have voting rights.

Unvested Options Cannot Vote

Unvested options cannot vote, but neither can vested options. A stock option is a form of equity compensation that gives the employee the right, but not the obligation, to buy company shares in the future at a fixed price. Therefore, although a stock option has the potential to be converted into a share in the company, it is not itself a share in the company. Regardless of whether they are vested or not, options do not come with the right to vote.

If you would like to learn more about stock options, click here. If you are looking for legal counsel to help you navigate startup equity, feel free to reach out to us here.

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