A stock option gives you the right to buy a set number of shares at a fixed price. To encourage you to stay with the company longer, you have to earn the right to purchase options over time. This is called vesting.
There are three types of vesting schedules: time-based, milestone, and hybrid. Under a standard four-year time-based schedule (48 months total), ¼ of your shares will vest after 1 year, and 1/36 of the remaining shares will continue to vest each of the remaining months after that. Under milestone vesting, vesting is triggered by completing a specific project or reaching a goal. Hybrid vesting is a combination of time-based and milestone vesting.
Let’s see an example:
Kerri was hired on November 1st, 2014 with an option grant for 100 shares vesting over 4 years.
One year after her hire date, November 1st, 2015, she reaches her cliff and a fourth of her shares vest.
For the next three years, she vests two shares every month. By Nov 1st, 2018 she is completely vested, with 100 shares available to exercise.
If she leaves the company before Nov 1st, 2018, her shares will stop vesting immediately and she only has the right to buy the shares that have vested as of that date.