Vesting and option pools explained

Four different questions about equity

Employee equity discussions often mix together a grant’s size, vesting schedule, exercise terms, and the company’s option pool. Keeping them separate makes the cap table easier to read.

Grant

The award recorded for a particular holder, with its quantity and terms.

Vesting

The schedule or conditions under which rights under the award are earned.

Exercise

For an option, the action of purchasing shares under the option’s terms.

Available pool

The plan reserve that remains available for eligible future awards.

An option is not the same instrument as an issued share. Cooley’s comparison of stock and options explains the distinction and how vesting can apply to each.

A four-year vesting example

Assume an option grant covers 48,000 shares, vests over 48 months, and has a 12-month cliff. In this illustrative schedule, 12,000 units vest at the first anniversary and 1,000 units vest each month after that. Assume continuous service and no acceleration, cancellation, or other changes.

This is an example, not a required schedule. Use the dates, cadence, conditions, and rounding rules in the actual award agreement.

Vesting is not exercise

A vested option has not necessarily been exercised, and vesting does not automatically create an issued share certificate. Some awards permit early exercise; others do not. Exercise windows and expiration dates also matter.

In Cap Table, record the vesting schedule on the award and use the exercise workflow for a later exercise. Review any resulting certificate so the issued shares and grant record remain connected.

For RSUs, use the settlement workflow rather than an option exercise. The award type determines which terms and actions are relevant.

How an award uses a plan reserve

Suppose an equity plan has a 1,000,000-share reserve with no previous awards. A 48,000-unit grant leaves 952,000 available shares, assuming the award is eligible and no other events affect the plan.

The full grant draws from the plan when granted. The reserve does not wait for each monthly vesting installment. In the app, unvested options still count toward fully diluted ownership.

If an award is later cancelled or expires, the plan’s recycling rules determine where the affected shares go. Returning them to the same plan, retiring them from availability, and directing them to a successor are different outcomes. Confirm the rules against the plan documents.

Avoid double-counting the pool

When using a fully diluted basis that includes the pool, distinguish granted awards from the unallocated reserve. Adding both the full original reserve and all the awards drawn from it can count the same capacity twice.

In the simple example, 48,000 granted units plus 952,000 unallocated shares account for the 1,000,000-share plan reserve. Later exercises, cancellations, transfers, and plan rules can change that reconciliation.

Read Manage equity incentive plans to inspect balances and reserve movements, or Record shares and equity grants to enter an award.