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Reverse vesting

An 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.

Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
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was last updated on Tue, Aug 21, 2018.
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