A vesting schedule dictates when you may exercise your stock options or when the forfeiture restrictions lapse on restricted stock. Vesting is determined separately for each grant. A schedule is time-based (graded or cliff) if you must work for a certain period before vesting. The schedule can also (or instead) be performance-based or tied to company-specific or stock-market targets. Vesting in some situations can be accelerated by the board of directors or at certain events, such as a merger or your death (check your plan for specifics).
Example: You are granted 5,000 stock options or shares of restricted stock. Your graded vesting schedule spans four years, and 25% of the grant vests each year. At the first anniversary of your grant date and on the same date over the subsequent three years, 25% of the options or restricted stock vests. Once each portion vests, you can exercise the corresponding options or sell the shares of restricted stock. This chart illustrates the vesting schedule:
For survey data on the different types of vesting schedules that companies use, see an FAQ on typical vesting schedules and an FAQ specifically on time-based schedules.
Termination almost always stops vesting except in certain situations (e.g. death, disability, or retirement, depending on the specifics of your plan and grant agreement).
Example: Following the situation of the prior example, you leave your company three years after the date of grant. You forfeit the 1,250 shares that have not yet vested. For any unexercised vested stock options (potentially 3,750) you must follow the post-termination exercise rules.