DEFINITION of Vest Fleece
Vest fleece is a slang term used to describe a situation in which a company accelerates the vesting of employee stock options to capitalize on an elevated stock price. Moreover, accelerated vesting is usually preceded by a period of excessively high employee stock option grants. Stock option holders are able to turn their options into stock in a shorter time period, with a deleterious effect on existing shareholders.
BREAKING DOWN Vest Fleece
Coined by Jack Ciesielski, founder of The Analyst's Accounting Observer, a vest fleece is named such because existing shareholders suffer dilution from the issuance of additional shares that result from the exercise of stock options. The control of stock option grants rests in the hands of a compensation committee of a company's Board of Directors. Ultimately, in almost all cases, shareholders determine who has the privilege of sitting on a board. Shareholders expect board members to act within reasonable norms of corporate governance, but human nature of greed may seep too much into the minds of "independent" directors ("independent" in quotes because directors are supposed to act in the interest of shareholders instead of themselves and management). A vest fleece is one of many ways that board members can grab money for themselves and their buddies who manage a company. Shareholders, the owners of the company, be damned. At one of its quarterly meetings a board can decide to change vesting terms so that instead of, say, a three-year vesting period for stock options, the options would vest immediately.
The opportunity for executives and directors to exercise options right away would be lucrative because the stock is trading at high levels. Part of the vest fleece scheme can include larger-than-normal granting of options prior to acceleration of a vesting schedule to maximize payouts. Additional share issuance on an accelerated basis will result in unwelcome dilution for existing shareholders, who, if they care enough, would take action to slap or cut off the greedy hands that take money from their pockets.