What is share vesting?
Share vesting refers to the process wherein the right to own or exercise shares is given over time or upon achieving certain milestones.
It means that even though an employee might be granted a certain number of shares, they do not own them outright from day one.
Instead, they earn or vest these shares over a specified period or upon meeting specific criteria.
The rationale behind this is to incentivise long-term commitment and performance from the employees, ensuring they remain aligned with the company’s growth and success.
Do I need a share vesting agreement?
A Share Vesting Agreement is a contract between an employer and an employee (or consultant) detailing the terms and conditions for shares and share options to vest.
Employers typically create share vesting agreements with suitable incentives to ensure the employee’s interests align with the company’s goals.
Commonly utilised in startups, these agreements are also prevalent in larger organisations keen on attracting and retaining vital executives.
What is reverse vesting?
Reverse vesting is a distinctive mechanism where shares are allocated to an individual upfront. Yet, the company retains the right to repurchase those shares at a nominal price unless specific conditions are fulfilled.
Contrary to traditional share vesting, where shares are vested over time, in reverse vesting, the shares are awarded immediately but may be repurchased by the company if the individual fails to meet certain milestones or remains with the company for a set duration.
This approach is particularly prevalent in start-ups, where founders may receive their shares at the outset as part of the Founders Agreement.
However, the company can repurchase the shares if a founder leaves prematurely. This ensures that only those who contribute significantly to the company’s growth and longevity retain their equity stake.
Why are share vesting agreements important?
Share vesting agreements offer clarity for both the company and the employee. Their objective is to safeguard the interests of all involved, ensuring that share ownership is restricted and justly earned.
The vesting of shares is often tied to an employee’s performance, aligning their incentives with the company’s success.
Key components of share vesting agreements
For any Share Vesting Agreement to be effective, its terms need to be clear to all parties involved:
1: The shareholder’s name, contact details, and the specifics about the number and type of shares to be vested should be prominently featured.
2: The agreement should lucidly outline the vesting criteria. Typically, these criteria are two-fold:
- Time-based: Shares vest according to a predetermined schedule.
- Performance-based: Shares vest upon meeting specific employee KPIs.
3: Cliffs, which are preliminary periods during which employees do not qualify for any vesting, need to be defined. These typically last between three months to a year.
4: Provisions about company buy-outs, acceleration, and liquidity events are crucial. Such circumstances might trigger rapid or immediate vesting of share options, and detailing them prevents future disputes.
Acceleration clauses in share vesting agreements
Acceleration is pivotal in vesting agreements.
It is activated during a liquidity event, which refers to significant corporate milestones like an IPO.
In such instances, shares might vest immediately or continue to vest, albeit differently. Hence, companies must predetermine their strategy and adapt their share vesting agreements accordingly.
Employee share vesting agreement
An employee vesting agreement template is a standard document used by companies in the UK and other regions to outline the terms under which stock or equity in the company becomes owned (or “vests”) by an employee over a set period. This template serves as a foundational framework to ensure clear communication and understanding between the employer and the employee regarding the vesting of equity as part of the employee’s compensation package.
The template typically includes several key components, such as:
- Grant Date: The date on which the equity is granted to the employee.
- Vesting Schedule: Details on how and when the shares will vest. This often includes a “cliff” period, after which a certain percentage of shares vests, followed by gradual vesting of the remaining shares over time.
- Type of Equity: Specifies whether the equity is in the form of stock options, restricted stock units (RSUs), or another type of equity.
- Conditions for Vesting: Conditions under which the vesting occurs, which may include continued employment, performance milestones, or other criteria.
- Termination Provisions: Outlines what happens to the unvested and vested shares if the employee leaves the company, whether through resignation, termination, or retirement.
- Clawback Provisions: Conditions under which the company can reclaim vested or unvested shares, typically in cases of misconduct or breach of contract by the employee.
Note that while shares are a great tool for loyalty and motivation, there are better methods to ensure employee retention.
If an employee leaves, their shares’ fate depends on the share option’s structure mentioned in the employment contract.
Companies might let employees retain their shares or attempt a buy-back. Typically, a distinction between ‘good’ and ‘bad’ leavers is made, affecting the buy-back price.
Share vesting agreement template
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