Forty-six per cent of professionals are thinking of leaving their jobs in 2024. If you’re among them, for whatever reason — resuming a new job, starting your own business, or just taking a break — then you’re probably among the millions of employees wondering, "How do I calculate my vested shares when I am leaving a company?"
Equity compensation, especially vested shares, is a powerful financial tool for employees. However, understanding what happens to these shares when you leave your job can feel overwhelming. Understanding the essentials, like vesting schedules, market value, tax implications, and what happens to your shares after leaving, makes it much easier.
In this guide, I'll explain step-by-step how to calculate your vested shares when leaving a company, explore some options for managing them after leaving, and answer common questions.
TL;DR: Key takeaways from this article
- Vested shares are stocks you fully own after meeting conditions like time-based or performance-based vesting schedules.
- Terms like grant date, cliffs, accelerated vesting, and the equity roll forward formula are crucial for accurately tracking and calculating shares.
- Here’s the formula to determine the value of your vested shares at any given time: Total value of your vested shares = Number of vested shares × Fair market value (FMV).
- Vested shares remain yours, but unvested shares are forfeited unless your company allows accelerated vesting.
- You can exercise stock options, sell, or transfer vested shares, but you should understand company policies and tax implications.
What are vested shares?
Vested shares are a portion of equity — such as stock options, restricted stock units (RSUs), or shares — granted to employees that become wholly owned only after meeting certain predefined conditions.
These conditions typically fall into two categories:
- Time-based milestones: Shares vest incrementally over a specified period (e.g., four years).
- Performance-based milestones: Shares vest after achieving specific goals, like revenue targets or product launches.
Vesting periods and schedules
A vesting period is the total time required to own all granted shares fully. It’s governed by a vesting schedule outlining the timeline and structure for when shares become vested.
Common types of vesting schedules include:
- Linear schedules: Shares vest gradually, such as monthly or annually, over a fixed period (e.g., four years).
- Cliff vesting: A delay before the first portion of shares vests, such as a one-year cliff where you receive no equity for the first 12 months, but once you pass the mark, you gain the first portion.
Examples of vesting arrangements
- Four-year vesting with a one-year cliff: You receive 25% of your shares at the end of year one, and the remaining 75% vest monthly or quarterly over the next three years.
- Three-year performance-based vesting: Shares vest after meeting agreed performance criteria, such as reaching specific key performance indicators (KPIs) within a set timeframe.
Purpose of vesting structures
These structures incentivise employees to stay longer with the company and align their interests with company performance, creating shared goals between employers and employees.
For example, if you are granted 10,000 shares with a four-year schedule (one-year cliff):
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- After one year, 2,500 shares (25%) vest.
- Monthly vesting over the next three years releases the remaining 7,500 shares (75%).
Key terms and concepts in equity calculations
Understanding equity compensation terms like vesting period and vesting schedule is essential for calculating vested shares.
Other relevant terms include:
- Cliff: The minimum period before the first portion of shares vests. Typically, cliffs incentivise employees to commit to the company for at least a year.
- Accelerated vesting: A provision that allows shares to vest faster than the original schedule, often triggered by events like company acquisitions or terminations without cause.
- Grant date: The date on which equity is formally granted to an employee. This date is the starting point for the vesting schedule.
Why are these terms relevant in calculating vested shares?
These concepts are critical to understanding the number of your shares that vest over time and what will happen to them when you decide to leave the company. So, take note of them.
Now, let’s see how you calculate the value of your vested shares when you’re leaving a business.
How to calculate your vested shares
If you're leaving your company and want to calculate your vested shares, here’s a step-by-step guide to ensure clarity and accuracy:
Step 1: Understand your vesting schedule
Your vesting schedule outlines when shares become fully yours. Common schedules include immediate vesting (shares vest all at once) and multi-year vesting. The most popular vesting schedule vests over four years with a one-year cliff (no shares vest in the first year, and then 25% vest at the one-year mark).
Note: Review your employment contract or equity plan to confirm your schedule and understand when the shares will be yours.
Step 2: Calculate the number of vested shares
Use your vesting schedule to calculate the shares vested by the time you’re quitting your job.
For example, let’s say you were granted 10,000 shares, and your vesting schedule is four years, with a one-year cliff, but you’re leaving the company after only two years of employment.
Your number of vested shares will be as follows:
- Year 1 (cliff): 2,500 shares vest (25% vests).
- Year 2: 2,500 more shares vest (another 25% vests).
Total vested shares by the end of two years when you’re leaving: 5,000 shares
Step 3: Determine the fair market value (FMV)
Fair market value is the current value of each share.
- For public companies, check recent stock prices.
- For private companies, consult the company or a financial advisor for a valuation.
Step 4: Calculate the total value of vested shares
Formula:
Total value of your vested shares = Number of vested shares × Fair market value (FMV)
For example, if you have 5,000 vested shares when you’re leaving, and the FMV is ₦100 per share, your total vested shares value would be ₦500,000.
Some important notes
As you calculate your vested shares when leaving, take note of the following two things:
1. Tax implications
Equity compensation can have significant tax implications. Taxes vary depending on:
- Type of equity: Restricted stock units (RSUs), restricted stock awards (RSAs), or stock options have different tax treatments.
- Holding period: Shares held longer may qualify for lower capital gains tax rates.
Pro tip: Consult a tax advisor to minimise liabilities and understand your responsibilities.
2. Additional equity terms
Some agreements include:
- Accelerated vesting: In certain cases (e.g., company acquisitions or terminations without cause), shares vest faster upon departure.
- Post-termination exercise period: If you have stock options, you may need to exercise them within 90 days or forfeit them.
Example of how to calculate the total value of vested shares
Question: You’re granted 2,000 shares with a four-year vesting schedule (one-year cliff), and you’re leaving after three years when the FMV is ₦1,000; what’s the total value of vested shares by the time you quit?
Let’s combine the steps:
Calculation:
Year 1 (cliff): 500 shares
Year 2: 500 shares
Year 3: 500 shares
- Total vested shares: 1,500 shares
- FMV: ₦1,000 per share
- Total value of vested shares: 1,500 × ₦1,000 = ₦1,500,000
What happens to vested shares when you leave a company?
Your vested shares remain yours when you leave, but unvested shares are forfeited unless accelerated vesting applies.
Options for your vested shares
Once you’ve determined the value of your vested shares, the next step is deciding how to manage them effectively.
Here are some key actions to consider:
1. Hold shares: If you believe in the company’s growth, holding onto your shares could lead to higher returns. However, consider the potential risks, such as market volatility or the company’s financial health.
2. Sell shares: Selling your shares is an option if you need liquidity or want to reduce exposure to a single investment. Before selling, evaluate tax implications (such as capital gains tax) and market conditions to optimise your selling price.
3. Diversify your investments: Proceeds from selling vested shares can be reinvested to diversify your portfolio. This strategy helps reduce risk and positions you for long-term financial growth.
4. Seek professional advice: Consult a financial advisor if you’re unsure about your options. They can help align your decisions with your broader financial goals and provide insights on tax-efficient strategies.
FAQs about vested shares and leaving a company
Do you keep vested RSUs if you leave a company?
Yes, you can keep vested RSUs (restricted stock units). However, you must adhere to any post-employment rules specified in your equity agreement.
What is an equity roll forward, and why is it important?
An equity roll forward is a financial tool used to track changes in equity ownership over a specific period. It outlines how equity balances evolve due to share grants, exercises, forfeitures, or repurchases.
This tool is crucial for maintaining transparency and ensuring accurate calculations, helping employees and investors understand their stakes, and making informed decisions about equity compensation.
What happens to unvested shares?
Unvested shares typically revert to the company unless your agreement includes accelerated vesting provisions.
Can I sell my vested shares immediately after leaving?
Yes, provided your company allows it, and there are no restrictions, such as a lock-up period or regulatory limitations.
What happens to vested stock options when a company is acquired?
When a company is acquired, vested stock options typically retain their value. Depending on the terms of the acquisition, they may convert into equivalent options for the acquiring company's stock, be cashed out, or remain exercisable for a defined period. Reviewing your stock agreement and consulting HR or legal advisors is essential.
What’s the difference between vested and unvested stocks?
Vested stocks are fully owned by the employee, granting the right to sell or transfer them, while unvested stocks are not yet owned and are subject to conditions like time or performance milestones in a vesting schedule.
Can vested shares be taken away?
No, vested shares are generally yours to keep. However, company policies or agreements may impose conditions like restrictions during mergers or acquisitions.
What happens to stock options if you get fired?
What happens to your stock options if you’re fired depends on your company’s policy and the specifics of your stock option agreement. Review your agreement or speak with HR to understand the specific rules applicable to your situation.
However, you may typically have a limited window (e.g., 30–90 days) to exercise your vested options. Unvested shares, on the other hand, are generally forfeited upon termination.
Conclusion
Calculating vested shares may seem tricky, but understanding your vesting schedule and tools like the equity roll forward makes it more manageable. Always consult HR or a financial advisor to maximise the value of your equity and stay informed about any deadlines or restrictions.
