How vesting works

Vesting is the condition attached to a grant. Stay, and the units become shares in instalments. Leave, and whatever has not vested goes back to the company.

Two patterns cover almost everything.

A schedule spread evenly. A four year grant vesting quarterly delivers one sixteenth of the units every three months.

A cliff. Nothing vests until a first date, usually one year, and then a block arrives at once and the rest follows on a regular rhythm. The cliff exists so that someone who leaves in month eleven takes nothing.

What happens to unvested units when someone leaves is called forfeiture. The units are cancelled and return to the pool the company grants from.

Companies report every one of those events in a single table. Apple's restricted stock unit activity for the year that ended September 30 2023, in thousands of units.

Check that it balances. 201,501 plus 88,768 minus 101,878 minus 8,144 is 180,247. It does.

Now read the story in it. Apple granted 88,768 thousand units in the year and 101,878 thousand vested. More left the pool than entered it, which is why the outstanding balance fell from 201,501 to 180,247.

The cancelled line is forfeiture in aggregate. 8,144 thousand units belonged to people who left before those units vested. Against 201,501 thousand outstanding at the start that's about 4%.

The right hand column is the average price at which each group was granted, not today's price. Units vesting this year were granted years ago at an average of $97.31. Units granted this year came in at $150.87. The gap between those two columns is the share price having risen in between.

The trap is thinking your grant vests on your anniversary.

Read the schedule in your own grant agreement. Vesting dates are often fixed calendar dates set by the company, not dates that track your start date. Quarterly schedules commonly land in the same four months for everybody. This matters when you are deciding when to leave, because a resignation two weeks before a vesting date forfeits that entire instalment.

The second trap is assuming forfeiture is rare because you would never walk away from money. Apple cancelled 8,144 thousand units in one year. People leave mid-cycle all the time, for reasons that have nothing to do with the grant.

The third is arithmetic. A four year grant is not a quarter of the value each year unless it vests evenly. A grant with a one year cliff delivers nothing, then a lump, then a rhythm. Which shape you have is written in the agreement.