Accelerated Vesting Stock Options

by Walter Johnson

The concept of an accelerated and vested stock option takes at least three concepts into account and combines them. The three concepts are the option itself, the vesting period of the option and how fast or slow this time takes to be completed. In general, this set of ideas is relevant to employees or managers who receive stock as part of their basic compensation plan. Normally, if stock is used as compensation directly, there is no vesting period.

Stock Options

Many firms provide their employees with stock options. This can mean either than the employee has the right, but not the duty, to accept stock as a reward for good work, or it can mean the firm actually gives options on its stock as a form of compensation or bonus. The latter is the more common meaning, and it refers to the right, though not the obligation, to buy or sell stock sometime in the future at an agreed upon price. In other words, it is a future right to control the stock in question.

Vesting

For an option to be vested, it means that an employee, after receiving the option, may not use it until a certain period of time has elapsed. There are several reasons for this. The most common is that the vesting period keeps an employee on the job and working hard. Most of the time, these options must go back to the firm if the employee quits or is fired. Just as important is the fact that most firms do not want their employees just cashing in their options immediately.

Acceleration

Under certain circumstances, especially during a merger period where the firm itself is failing, the vesting period on the options is pushed up. This is called the “accelerated vesting” option. In general, it means that employees at whatever level can liquidate their holdings before the merger occurs, so as to avoid any loss. Sometimes, high-level executives in a failing firm can use this accelerated option as a means of making a quick profit before they are parachuted from the operation.

Speedy Options

The vested concept is a form of employee discipline. It forces employees to keep loyal to the firm lest the option be taken from the worker. On the other hand, to accelerate or eliminate the vesting period is a means of quickly getting rid of the stock -- or at least the option to buy or sell -- right away. This could serve as a quick way to make profits if the firm's stock will either go up or down drastically because of a merger or some other radical change in the firm's status. While it is true that any employee can request an accelerated vesting schedule, the use of this particular device is most commonly reserved for major executives in the firm.

About the Author

Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."

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