Can You Sell Unvested Stock?
Understand the complexities of selling unvested stock, its limitations, and what happens as your equity compensation vests.
Equity compensation, such as Restricted Stock Units (RSUs) or stock options, is a common component of employee compensation packages. These awards are designed to align employee interests with company performance and provide a stake in the business’s success. A frequent inquiry among recipients of these equity awards concerns the ability to sell them, particularly when the shares are considered “unvested.”
Understanding the Vesting Process
Vesting refers to the process through which an employee gains legal ownership of equity compensation awards. This mechanism serves a primary purpose of employee retention, encouraging individuals to remain with a company for a specified period. Until vesting occurs, an employee does not have complete rights to shares.
Companies typically employ various vesting schedules to define when these ownership rights are transferred. Time-based vesting is common, where a percentage of the award vests annually over several years. Another common structure is cliff vesting, where no shares vest for an initial period, often one year, after which a substantial portion or all of the award vests at once. Performance-based vesting ties the release of shares to the achievement of specific company or individual performance metrics.
Why Selling Unvested Stock is Not Possible
Unvested stock generally cannot be sold because the recipient does not yet possess full legal ownership. The grant of equity compensation represents a promise of future ownership contingent upon meeting specific conditions, most commonly continued employment.
The inability to sell unvested stock is primarily governed by contractual agreements between the employee and the granting company. These grant agreements explicitly outline the vesting schedule, forfeiture conditions, and restrictions on transferability. Company policies further reinforce these limitations, prohibiting the sale or transfer of shares that have not yet vested. These restrictions ensure the company’s retention goals are met and prevent premature liquidation intended as long-term incentives.
Regulatory considerations also play a role, particularly if shares have not been formally issued or registered in the employee’s name. Transferring unvested shares could complicate compliance with securities laws, which require full ownership and proper registration before shares can be freely traded. Until vesting conditions are fully met, the shares remain subject to the terms of the grant and are not available for sale.
What Happens to Unvested Stock Upon Vesting
Upon successful completion of vesting conditions, unvested stock transitions into fully owned shares. This means the employee gains complete legal title and control over the equity award. For RSUs, shares are typically delivered to a brokerage account designated by the employee. For stock options, the employee gains the right to exercise options and purchase the underlying shares at a predetermined strike price.
A significant aspect of vesting involves tax implications, which typically occur at the time of vesting for RSUs. The fair market value of shares on the vesting date is generally recognized as ordinary income to the employee. This amount is subject to federal income tax, Social Security tax, Medicare tax, and often state and local taxes, similar to how regular wages are taxed. Many companies facilitate this by withholding a portion of vested shares or cash to cover these tax obligations.
Once shares are vested and any associated taxes are handled, the employee has several options. They can choose to hold the shares as a long-term investment, potentially benefiting from future stock price appreciation. Alternatively, they may decide to sell the shares through a brokerage account, though this is often subject to company-imposed trading windows or blackout periods. For stock options, the employee can choose to exercise and hold the shares, or exercise and immediately sell them, depending on their financial strategy and market conditions.
Impact of Employment Changes on Unvested Stock
Changes in employment status can significantly impact unvested stock awards. In most typical scenarios, if an employee resigns or is terminated prior to the vesting date, any unvested stock is forfeited. This means the employee loses all rights to those shares, and they revert back to the company. The specific terms of forfeiture are detailed within the grant agreement.
However, certain circumstances may allow for exceptions to this general forfeiture rule. Some grant agreements include provisions for accelerated vesting, which can occur under specific conditions. For example, in the event of a company acquisition, a “double trigger” clause might exist, where vesting accelerates only if both a change of control occurs and the employee is subsequently terminated without cause. Retirement clauses are also common, where employees meeting certain age and service requirements may have their unvested awards continue to vest or accelerate upon retirement.
It is important for employees to review their specific grant agreements and company policies to understand the precise implications of employment changes on their unvested equity. These documents outline any provisions for continued vesting, accelerated vesting, or forfeiture upon events such as resignation, involuntary termination, disability, or death. The fate of unvested stock is entirely dependent on the terms stipulated in these binding agreements.