When companies issue equity – particularly when it is to employees or other service providers – they sometimes subject the equity to various restrictions that lapse either (a) over time (so long as the person continues to work for the company) or (b) upon the occurrence of specified events. “Vesting” occurs when the restrictions lapse and the equity goes from “unvested” to “vested” (i.e. from restricted to unrestricted). Most of the time, the restrictions provide that the recipient forfeits the equity if the conditions to vesting are not satisfied.
Time-based vesting usually occurs over one to five years, with four years being the most common vesting period for rank-and-file employees of tech companies. The equity usually vests in equal monthly or quarterly installments over the entire vesting period, except that it is common to have one year of vesting deferred until the end of the first year (this is called “cliff” vesting). So an employee granted options to purchase 480 shares that vest monthly over four years with a one year cliff would, if they remained employed by the company, have options to purchase 120 shares vest on the first anniversary of the date the option was granted and options to purchase an additional 10 shares vest every month thereafter for the following three years until all options had vested.
Vesting upon the occurrence of specified events, or “milestones,” is more common for senior executives, whose compensation may be tied, in part, to the performance of the company, and for independent contractors whose compensation is tied to the performance of clearly defined tasks. The events that trigger vesting can be whatever the company and the recipient agree to, but it is important that they are sufficiently well defined that there will be no room to debate whether and when they are completed.