Understanding Vested and Unvested Shares

Explore the key differences between vested and unvested shares, their tax implications, legal considerations, and their role in employee retention.
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3 mins read
18-June-2025

If your company has given you share options, you may have heard the words vested and unvested shares. But what do they really mean for you? Knowing the difference can help you make better choices like when to leave a job, when to sell your shares, or how to get money from them without giving them up.

Let’s make vested vs unvested shares easy to understand, so you know exactly what’s yours and when.

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What are vested shares?

Vested shares are stock options or equity grants that you fully own after completing certain conditions usually outlined in a vesting schedule. These conditions often include spending a set number of years with the company or meeting specific performance goals. Once vested, the shares are officially yours. You can sell, transfer, or hold them, and enjoy shareholder benefits like voting rights and dividends. Vested shares aren’t just incentives they are real financial assets tied to your contributions. They play a major role in wealth creation, especially in fast-growing companies, and align your success with the company’s performance.

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What are unvested shares?

Unvested shares are stock options granted to you but not yet owned. Their ownership depends on meeting certain conditions usually staying with the company for a specific time or achieving set performance milestones. Until vested, these shares cannot be sold, transferred, or used for any financial benefit. If you exit early, they are usually forfeited. They are designed to encourage long-term commitment and performance, especially in startups or growth-stage firms, where equity is a major part of compensation.

Difference between vested and unvested shares

Understanding the key differences between vested and unvested shares can help you make smarter equity-related decisions.

Aspect Vested Shares Unvested Shares
Ownership Fully owned by the employee. Not yet owned by the employee.
Transferability Can be sold or transferred. Cannot be sold or transferred.
Voting Rights Include voting rights and dividend entitlements. No voting rights or dividend entitlements.
Forfeiture Retained after leaving the company. Typically forfeited if the employee exits prematurely.
Financial Benefit Immediate financial benefit upon sale. No financial benefit until vested.


This distinction helps employees plan better and weigh their options during events like job switches or ESOP monetisation.

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Vesting schedules: Time-based vs. milestone-based

Companies generally adopt one of three vesting structures: time-based, milestone-based, or a hybrid of both. Each model serves a different purpose when it comes to motivating employees and aligning their goals with the company’s long-term objectives.

  • Time-based vesting grants equity gradually over a specified period monthly, quarterly, or annually ensuring consistent engagement and retention.
  • Milestone-based vesting, on the other hand, ties ownership to the achievement of specific performance goals, such as launching a product, meeting revenue targets, or clearing regulatory hurdles.
  • Combination schedules blend the two, offering both predictability and performance-linked incentives.

Time-based models work well for long-term planning, while milestone-based structures offer ambitious employees the chance to unlock shares faster based on actual results.

Common vesting cliffs and acceleration clauses

  1. Imagine working for a year and not earning a single share. Sounds harsh? That’s a cliff. Typically, if your plan has a 1-year cliff, you get nothing for the first year. But hit that mark, and a chunk vests all at once. After that, your shares vest gradually (called graded vesting). Then there’s the acceleration clause your safety net. Say the company gets acquired, or you’re laid off without cause. With acceleration, some or all of your unvested shares vest instantly. No more waiting. This is especially important in fast-moving startups or M&A situations where roles shift quickly.

Tax implications of vested vs unvested shares

  1. When your shares vest and you exercise them, the difference between the exercise price and the market value is taxed as a perquisite under your salary. Later, when you sell those shares, capital gains tax kicks in based on how long you held them.
  2. But here is the good news: unvested shares do not attract any tax simply because they aren’t technically yours yet.
  3. Understanding this tax timeline is crucial. A misstep could leave you with a bigger tax bill than you expected especially if your equity value spikes.

Vested shares and employee retention

Vested shares are an effective tool for retaining top talent. They incentivise employees to stay with the company, as ownership rights are tied to completing a vesting schedule. By offering these shares, employers align employee interests with business growth, ensuring a committed and motivated workforce. Vested shares also foster a sense of belonging, enhancing job satisfaction and reducing attrition rates, particularly in competitive industries.

Impact of leaving the company: Vested vs unvested

Thinking about moving on? Here’s what you need to know. If your shares are vested, they’re yours—even if you leave the company. You can sell them, hold them, or transfer them (based on the rules of your share plan). But if your shares are still unvested, you usually lose them if you leave too early. That’s why it’s important to check your vesting schedule before handing in your notice.

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Vested vs unvested shares: Legal considerations

Vested shares are legally yours. That means you have full rights like voting, getting dividends, and even transferring them, if allowed by your company.

On the other hand, unvested shares aren’t yours yet. You don’t get any rights until the set conditions are met. Most ESOP agreements also include details about things like early vesting (acceleration), how disagreements are handled, or what happens if you leave early.

So before making any major decisions, take time to read your ESOP documents closely.

Conclusion

Understanding the difference between vested and unvested shares can make a big difference in how you manage your money and career. Vested shares give you real ownership and the chance to benefit right away. Unvested shares are a promise for the future but only if you stay on long enough. Whether you are planning to switch jobs, pay taxes, or want to unlock cash without giving up your shares your ESOPs can help you get ahead.

Own your shares. Access your funds. Keep growing. Apply for ESOP financing

Frequently asked questions ‌
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What is the difference between vested and unvested shares?
Vested shares are fully owned by the employee, allowing transfer or sale, while unvested shares are conditional on meeting tenure or performance milestones. Vested shares offer ownership rights, whereas unvested shares are forfeited if criteria remain unmet.

What happens to unvested shares if I leave the company?

Unvested shares are typically forfeited when an employee resigns or is terminated before completing the vesting period. However, company policies may vary based on agreements or circumstances of the exit.

Are there tax implications for vested vs unvested shares?
Vested shares are taxable when exercised as perquisite income, with additional capital gains tax upon sale. Unvested shares have no tax implications until they vest or are exercised.

Do unvested shares have any value?

Unvested shares do not hold realizable value for the employee. They represent a future promise, not actual ownership. If you leave the company before vesting, you typically forfeit those shares entirely.

What is a vesting cliff?

A vesting cliff is the minimum period you must stay with the company before any ESOPs start vesting. For example, in a 1-year cliff, no shares vest until you complete one year of employment.

What are common types of vesting schedules?

The most common vesting schedule is 4 years with a 1-year cliff, followed by monthly or quarterly vesting. Some startups may offer accelerated vesting on exit events or milestone-based vesting for key hires.

When can I sell my vested shares?

You can sell your vested ESOPs during a liquidity event like an IPO, acquisition, or company buyback. Otherwise, they remain illiquid, and their value can only be realized when such an event occurs.

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