When a company grants you an option, you usually have to wait for a period of time until you can purchase the shares. This is known as vesting. For the most part, this is to incentivize you to stay with the company.
Types of Vesting
Graduated Vesting. This is when you vest a certain number of shares each year. Often, this is for four to five years.
Example: Suppose you receive an option grant for 10,000 shares that has a 4-year vesting period. In this case, you can exercise (purchase) 2,500 shares after year one, then another 2,500 shares after year two and so on.
Actually, this is cumulative. In other words, let’s say you do not purchase the 2,500 shares after the first year. Well, in the following year, you will be able to purchase 5,000 shares.
Cliff vesting. This is when all the options are vested when the time period is met. However, this approach is fairly rare.