What is Reverse
increasingly common Vesting
schedule in stock option plans offered by pre-IPO
companies. Under this arrangement, an option holder
is allowed to exercise options immediately they
are granted. For each option exercised, the option
holder receives a share of Restricted stock, which
itself is subject to vesting requirements. The restricted
stock may be forfeited if the vesting requirements
are not met.
The employer corporation usually holds the restricted
stock in an escrow account until vested. The company
may retain the right to repurchase any unvested
restricted stock if the holder's employment is terminated.
Exercising stock options immediately they are granted
can be attractive when combined with a so-called
Section 83(b) election under the Internal Revenue
Code. Reverse vesting is mechanism intended to facilitate
this tax planning technique.