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How does Share Vesting work?
Share vesting is when a company gives its equity to its employees or consultants to keep them with the company and incentivize them to reach established performance goals.
You will likely find your share options in your Employment Contract, and they are often used when a senior employee or an important advisor or consultant comes on board.
What are vesting shares?
Share vesting means the company gives its shares to an individual upfront, and the shares are subject to the company’s right to repurchase them.
These shares are known as unvested shares. The buyback right extinguishes over time (or upon fulfilment of certain conditions).
Shares released from this buyback right are known as vested shares. This mechanism is sometimes known as reverse vesting, as opposed to the grant of a share option, which is forward vesting.
Share vesting enables a senior employee or an advisor to have equity immediately upon coming on board. However, the company still retains control over those shares by way of a right to buy back, and, in this way, the company keeps the employee or advisor on board until the end of the vesting period.
How share vesting works
Step 1: Check your company’s Articles of Association/Constitution
Check if the company’s constitutional document restricts the buyback of its shares.
If it does, you may build in some appropriate mechanisms in your Share Vesting Agreement or consider another form of rewarding your team (for example, a Share Option Plan).
Step 2: Create a Share Vesting Agreement
Create and sign the Share Vesting Agreement. After signing, the following will take place:
- The employee/consultant pays for the shares on the “Purchase Date” that you set in the agreement;
- On the Purchase Date, the company secretary issues share certificates in the name of the employee/consultant, and he then becomes a company shareholder. The number of the share certificates and the number of shares covered by each certificate should match the vesting schedule;
- The employee/consultant signs a document known as a “Share Power” and delivers this document to the company secretary;
- The company secretary keeps the share certificates in the name of the employee/consultant and the Share Power in escrow; and
- When shares are vested (i.e. released from the company’s right to buy back) according to the terms of the Share Vesting Agreement, the share certificate in respect of that part of the shares will be delivered by the company secretary to the employee/consultant.
Step 3: The share recipient pays for the shares and signs the Share Power Agreement
The employee/consultant pays for the shares on the “Purchase Date” you set in the agreement.
In addition, the employee/consultant signs a “Share Power” and delivers this document to the company secretary.
Step 4: The company secretary issues and holds on to the share certificates
On the Purchase Date, the company secretary issues share certificates in the name of the employee/consultant, who then becomes a company shareholder.
The number of share certificates and shares covered by each certificate should match the vesting schedule.
The company secretary keeps the share certificates in the name of the employee/consultant and the Share Power in escrow.
Optional: Exercise of the buyback right
If the employee/consultant leaves the company, any unvested shares will be subject to the company’s right to buyback.
The company may exercise its buyback right for three months after the employee/consultant leaves. The buyback right is deemed to be automatically exercised by the company upon the expiry of the three months.
This is unless the company notifies the employee/consultant that it does not intend to exercise the buyback right.
If and when the company exercises the buyback right, the company needs to pay the buyback price for the shares (the same price that the employee/consultant paid for the shares in the first place) to the employee/consultant.
Following this, the company secretary takes the necessary steps to make the transfer effective.
After the buyback, under Hong Kong and Singapore law, those shares will be regarded as cancelled. Ensure the company secretary files with the Companies Registry/ACRA within the applicable statutory timeframe after the share buyback.
Optional: Exercise of the call option
When creating the Share Vesting Agreement, you may opt for a “call option” to be put in place. This call option enables the company to do one of two things:
- Buyback all vested shares at fair value; or
- Convert all vested shares to non-voting shares (i.e. the employee/consultant, being the holder of the vested shares, can still receive dividends from the company but has no say in the company’s decision-making).
The company may exercise the call option for six months after the employee/consultant leaves the company.
What is a Share Power?
A Share Power is a document in which the employee/consultant gives his authorization to transfer his shares to the company.
It is only used if and when the company exercises the buyback right (which may or may not happen). Some information in the Share Power has to be left blank and can only be filled in by the company when it exercises the buyback right.