Graded Vesting

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Definition of 'Graded Vesting'

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Graded vesting is a type of stock option plan that allows employees to gradually earn ownership of shares over time. This is in contrast to an immediate vesting schedule, in which employees receive all of their shares at once.

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The purpose of graded vesting is to encourage employees to stay with the company for a longer period of time. This is because employees are more likely to exercise their stock options if they know that they will have a vested interest in the company's success.

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Graded vesting schedules typically have a cliff period, which is a set period of time after which employees must vest all of their shares. For example, an employee may have to work for three years before they are fully vested in their stock options.

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After the cliff period, employees may continue to vest their shares over time, according to a predetermined schedule. For example, an employee may vest 20% of their shares each year for the next four years.

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Graded vesting can be a valuable tool for companies to attract and retain top talent. By offering employees the opportunity to earn ownership in the company, companies can create a sense of shared ownership and motivate employees to work hard for the company's success.

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