A share vesting agreement (SVA) is a contract between a business and an employee, whereby the employee is provided with new shares that vest over time. These agreements lay out the terms and conditions regarding vested shares, as well as the options in relation to vesting.
What is Share Vesting?
Share vesting is not a specific type of share, but rather a characteristic of a share. In this, a vested share allows the shareholder to sell and trade the share whenever they desire. On the other hand, an unvested share is one that can be sold only after a specific goal is achieved. With that being said, the employee will still own the share when acquiring vested, or unvested shares.
What are the Benefits of Using a Share Vesting Agreement?
There are several benefits to using a SVA. Here are some of the key advantages:
Employee incentivisation
Setting a vesting period will incentivise your employees to commit to the company long-term. Here, employees are more likely to stay with the company until the end of the vesting period. This is because they will obtain full ownership and rights over their shares.
Big Risk → Big Reward
Share vesting can be risky. This is because a business is using equity which may lead to long-term loss. However, such a strategy can reflect a desire to grow the business. This is because employees who are offered an SVA are more likely to work harder to obtain their reward. Therefore, the business’s value will likely increase during a vesting period as employees are more committed to ensuring business success. This can also attract shareholders in the long run.
No downside if the employee leaves
To reiterate, an employee earns rights in conjunction with certain achievements. With that, they are not entitled to any rights not yet earned if they choose to leave the business. Therefore, a business will not lose all the equity they invest in an SVA.
Elements to include in a Share Vesting Agreement
Both parties must understand the elements of an SVA. Here are some elements that must be covered:
- Clearly identify the vesting criteria: Vesting can be performed in several ways. In particular, a business will often pursue time-based vesting. In this method, the shares are vested on a schedule. Alternatively, in performance-based vesting, shares vest when an employee achieves particular milestones.
- Specify whether there are cliffs: A cliff is a period of time where the employee’s shares cannot be vested. This is necessary if the employer chooses to pursue time-based vesting.
- Clauses in relation to acceleration: Acceleration refers to the way a share vests if there is a “liquidity event”. Without specifying this clause, a dispute is more likely to occur.
To Sum Up
An SVA is a good option for a business who cannot afford to pay their employees large amounts of cash up front. It can be beneficial in ensuring long-term employee commitment, company growth and in attracting shareholders. With that being said, it is important for both parties to understand the elements of an SVA, and the implications that may arise if they do not.
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Daniel is a legal intern at OpenLegal, placed in our legal content team. He is currently studying a Bachelor of Laws at the University of Technology Sydney. Daniel's interest lies in economics and media/startup law.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
