What is Accelerated Vesting?
Accelerated vesting occurs when a stock option becomes exercisable earlier than originally scheduled.
How Does Accelerated Vesting Work?
For example, let's assume that John Doe receives options to buy 2,000 shares of Company XYZ, his employer, for $10 a share. He receives the options as part of his compensation package.
Normally, his shares vest over a five-year period, meaning they do not become exercisable for five years. However, Company ABC comes along and buys a 51% stake in Company XYZ. Because this constitutes a change in control, John Doe's options automatically vest even though the five-year period has not elapsed. John exercises his options at $10 a share, sells the shares for $20 a share and walks away with a tidy profit.
Why Does Accelerated Vesting Matter?
Accelerated vesting can be a windfall to employees who have stock options, though some tax consequences can exist. Depending on the type of option, John Doe might need to pay taxes on the grant value of the shares ($10) as well as the capital gains on the profit from the sale of those shares.
