Share vesting is not a type of share but refers to the nature of a share – with that being said, a vested share is a share which is available to a shareholder to act upon or sell in the immediate sense. On the other hand, an unvested share, is an allocated share which cannot be acted upon or sold until a certain time period has elapsed or a trigger event has occurred.
Share vesting agreements are a common exercise amongst co-founders and employers within startups.
Benefits of Share Vesting Arrangements
Share vesting agreements can be an extremely useful tool in the world of start-ups as they not only help mitigate against unforeseen risks, but they also incentivise the relevant stakeholders in order to retain the necessary skill and commitment towards the start-up; both of which are common issues that often plague start-ups.
So How Does Share Vesting Work?
A common type of share vesting arrangement is known as time-based vesting – this is when allocated shares become vested after a certain time period (commonly four years). Normally, the share vesting process will commence one year from when the co-founders are in agreement, this is referred to as the ‘cliff’ period.
To put it simply, a certain percentage of shares will be vested after a 12 month and so on and so forth until the specified time period elapses and all the unvested shares are vested.
If the beneficiary of a share vesting arrangement were to leave the company before reaching the cliff, they would not be vested with any shares.It is also worthwhile to note that time periods and the ciff can be tailored to suit the particular needs of a company.
In addition to time-based vesting, shares can also be vested when a certain trigger event occurs, for instance, the achievement of a company revenue target or milestone.
Summary
To summarise, share vesting arrangements are quite flexible and can operate on a time basis or an event basis; these factors can be tailored to suit the requirements of different companies and parties based on the circumstances.
Contact us if you’d like advice on share structures, or any aspect of commercial / 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.
