What is a Vest Fleece?
A vest fleece occurs when a company accelerates the vesting of its employee stock options.
How Does a Vest Fleece 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 five years 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 a Vest Fleece Matter?
Vest fleecing occurs when a stock option becomes exercisable earlier than originally scheduled. Changes in control are a common reason, but ultimately companies have the authority to decide if an employee is suddenly fully vested.
Accelerated vesting can be a windfall to employees that 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.