REVERSE VESTING DEFINITION

Reverse Vesting = the process by which the right to continue holding Shares is earned in agreed proportions over an agreed period.

(e.g. in a sentence – Adam left the business after 2 years, and so only 50% of his 50 shares has vested. Therefore, he only gets to keep 25 shares, and he needs to return 25 shares to the Company).

PURPOSE

Incentivising sticking with the company.

If a co-founder leaves the business before the end of their ‘vesting’ period, then they don’t get to keep all of their shares. Depending on the vesting schedules and periods you mutually agree to, a co-founder who leaves may not be entitled to keep any of their shares. Alternatively, if they have completed their vesting period, they may be entitled to keep all of their shares on leaving.

DISTINCTION FROM STANDARD VESTING

Standard vesting is where the relevant individual only acquires the shares on specific milestones (e.g. completing 1 year of service) – up until the milestone is reached, the individual does not actually own shares in the company.

Reverse vesting is where all shares are granted up front but can be ‘clawed back’ by the company if milestones are not completed (e.g. the individual leaves the company before the agreed time period is completed).

ILLUSTRATION

Adam and Jenny are equal co-founders.

They agree to a 4 year vesting schedule, with the vesting spread equally across the period. They also agree to a 1 year cliff, so that if anyone leaves before the end of one year, they get nothing. The summary of these terms might look a bit like this:

Name Total Shares Granted Vesting Period Vesting Dates Continuous or Milestones
Adam 50 4 years 12.5% on each anniversary of the start date 1 year cliff, equal monthly vesting thereafter
Jenny 50 4 years 12.5% on each anniversary of the start date 1 year cliff, equal monthly vesting thereafter

 

The full agreement will have further details and provisions (e.g. for what happens if Adam or Jenny leaves before they complete the 4 years) but this illustrates the principle.

 

WHERE TO DOCUMENT IT

Once you have created your co-founder agreement, you can create a ‘reverse vesting agreement’ as an add-on to it – get in touch if you need help with preparing this or want to chat through it.

 

This Basic Training article was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated contracts and loads of startup legal resources and guides. For co-founder, vesting and other legal queries, contact us if you need help.

 

 

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