Share Vesting Agreement

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 unique mechanism where shares are granted to an individual upfront, but the company retains the right to buy back those shares at a nominal price unless certain conditions are met.

Instead of the shares vesting over time as in traditional share vesting, the shares are given immediately but can be repurchased by the company if the individual does not meet specified milestones or stays with the company for a predetermined period.

Reverse vesting is especially common in startups where founders may receive their shares upfront, but the company can repurchase them if a founder departs early.

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.

What happens to shares upon an employee’s departure?

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.

Create a vesting agreement template

In conclusion, share vesting agreements are fundamental in ensuring clarity and fairness when granting shares to employees.

Employers seeking to simplify this process should consider leveraging templates, such as the ones offered by Zegal, which provide a structured, easy-to-understand, and equitable framework for both parties.

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You can trust that Zegal agreements are legally sound and fully compliant with current regulations.

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