Vaid was born in India and moved to the United States at age eight with her family. Vaid was politically active from an early age, participating in the anti-Vietnam war movement at 11 years old, then at Vassar College, becoming active in a variety of feminist and human rights causes. She received a law degree from Northeastern University School of Law in Boston in 1983, where she founded the Boston Lesbian/Gay Political Alliance, a non-partisan political organization that interviews and endorses candidates for political office and advocates for Boston's gay community.
Vaid believes that true liberation of lesbians and gays from injustice will only occur when the larger institutions of society and the family are transformed through lesbians and gays working within mainstream groups for inclusion and change. Her book, The Mainstreaming of Gay and Lesbian Liberation (published in 1996), which won the Stonewall Book Award,, addresses her beliefs regarding mainstreaming.
Vaid took over leadership of the National Gay and Lesbian Task Force's Policy Institute in 1989, and quickly built the NGLTF into the nation's pre-eminent gay rights NGO. She pushed gay issues into the public eye through coordinated media manipulation and staged numerous protests on such subjects as abortion and the Persian Gulf War. Vaid went on hiatus from the NGLTF between 1992 and 1997 and wrote Virtual Equality: The Mainstreaming of Gay and Lesbian Liberation during this time. She resumed working at the NGLTF, serving as the organization's executive director for three years.
Vaid worked for 5 years at the Ford Foundation, and has been Executive Director of the Arcus Foundation since late 2005.
In April 2009 she was named one of Out magazine's 50 most influential men and women in America.
Vaid shares homes in Manhattan and Provincetown, Massachusetts, with her partner, comedian Kate Clinton.