In very simple and general terms, vesting refers to the amount of time an employee must work before acquiring a certain benefit. When an employee is granted ESOPs on joining a startup it means that he or she has the “right to purchase” the shares of the company subject to a certain timeline or criteria being met – this is referred to as “vesting” or “vesting frequency”. It is only after this criteria or timeline is met that an employee has the right to purchase (or exercise) the options.
Vesting is therefore the process by which an employee becomes eligible to exercise his/her stock options and become a shareholder in the company. For example, after one year 25% options can be exercised and after that every 6 months 12.5% can be exercised over the remaining 3 years. This is called the vesting frequency and the model above is referred to as “4 year bi-annual vesting with 1-year cliff”.