Vesting Period

A vesting period is the stretch of time over which someone earns the full right to an asset that has been promised to them, such as company shares, stock options, employer pension contributions or crypto tokens. Until an amount has vested, it can usually be taken back if the person leaves or breaks the agreement. Once vested, it belongs to them, although it may still be subject to other limits on selling.

Vesting is used by employers to reward staff who stay, by startups to keep founders committed, and by crypto projects to stop teams and early investors from selling their allocations all at once. It is often paired with a "cliff", an initial period before anything vests, and in crypto it is closely tied to scheduled token unlocks that release supply into the market.

Picture a gym that gives new staff a free membership worth a year, but only hands over one month's pass for each month they stay. Leave after three months and you keep three passes; the rest goes back. That is vesting: the reward is promised up front but earned gradually.

A cliff works like a probation period. If the first pass is only handed out after six months, someone who leaves after five gets nothing, while someone who reaches the six-month mark receives six passes at once and then one a month after that.

Schedules come in a few common shapes:

• Cliff vesting. Nothing vests until a set date, then a large portion or everything vests at once; see cliff vesting.
• Graded or linear vesting. Equal portions vest monthly, quarterly or yearly over the whole period.
• Cliff plus linear. A cliff followed by steady vesting, such as the four-year schedule with a one-year cliff that is common at US technology companies and crypto projects.
• Milestone vesting. Amounts vest when targets are met, such as a product launch or revenue goal, rather than with the passage of time.

For a linear schedule after the cliff has passed, the vested amount is:

• $V$ is the amount vested so far.
• $G$ is the total grant.
• $t$ is the time elapsed since the start date, and $T$ is the full vesting period, in the same units.

Before the cliff date, $V$ is zero. Take a grant of 48,000 tokens vesting monthly over 48 months with a 12-month cliff. At 10 months nothing has vested. At 12 months, 48,000 × 12 ÷ 48 = 12,000 tokens vest at once. At 30 months, 48,000 × 30 ÷ 48 = 30,000 tokens have vested.

In conventional companies, vesting applies to stock options, restricted shares and performance awards. Founders of startups backed by venture capital are often asked to put their own shares on a vesting schedule too, so that a founder who walks away early does not keep a large stake. Many agreements include acceleration clauses, which speed up vesting if the company is sold or the person is dismissed.

Pensions use vesting as well. In a workplace plan such as a US 401(k) plan, an employee's own contributions are always theirs, but matching contributions from the employer may vest over several years, within limits set by federal law. Other countries set their own rules, and some require employer contributions to vest immediately.

Crypto projects usually split their total supply between the community, the team, investors, advisers and a treasury, as set out in their tokenomics. Team and investor allocations are typically locked at the token generation event and then vested over one to four years, often with a cliff. The schedule is commonly enforced by a smart contract that releases tokens automatically, which lets anyone check it on chain rather than relying on a promise.

Vesting dates matter to traders because each release adds to circulating supply. Large unlocks are tracked closely, since recipients who received tokens at low prices may sell, a concern described as unlock pressure. Comparing circulating supply with fully diluted supply shows how much is still to come.

• Short schedules. Critics argue that some crypto allocations vest too quickly, letting insiders sell to later buyers soon after launch, an extreme form of which overlaps with a rug pull.
• Hidden terms. Some projects publish vague or changing schedules, and off-chain agreements can differ from what is announced.
• Golden handcuffs. In employment, unvested awards can keep people in jobs they would otherwise leave, which some see as a cost to workers.
• Tax timing. In many countries vesting is a taxable event, so recipients can owe tax on shares or tokens they cannot yet sell.