1: Check your company’s Articles of Association/Constitution
2: Create a Share Vesting Agreement
3: Exercise of the buyback right
4: Exercise of the call option
What is share vesting?
To vest shares is the means of giving equity to its employees or consultants. Typically, this serves as an incentive to reach certain goals and/or stay with the company for an extended period. Share vesting is often a good option when a senior employee or advisor comes on board.
How to do it
Step 1: Check your company’s Articles of Association/Constitution
Check if the constitutional document of the company restricts buyback of its own shares. If it does, you may build in some appropriate mechanisms in your agreement, or you may consider another form of rewarding your team (for example a Share Option Plan).
Step 2: Create a Share Vesting Agreement
Create and sign the 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 shareholder of the company. The numbers 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 vested shares (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: Exercise of the buyback right
If the employee/consultant leaves the company, any unvested shares will be subject to the company’s right to buy back.
Step 4: 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:
buy back all vested shares at fair value; or
convert all vested shares to non-voting shares (i.e. the employee/consultant can still receive dividends from the company but has no say in the decision-making of the company).
The company may exercise the call option for six months from the date the employee/consultant leaves the company.
The fair value of the shares is determined by the auditors of the company or an independent firm of accountants.