When drafting a shareholder agreement, many founders focus on the initial distribution of shares. However, it`s important to plan for the long-term and include a vesting clause. A vesting clause ensures that shareholders earn their shares over time and are committed to the company`s success.
What is a vesting clause?
A vesting clause is a provision in a shareholder agreement that outlines when and how shareholders will earn their shares. Typically, shares are earned over a period of time and are subject to certain conditions, such as continued employment or the achievement of specific milestones.
Why is a vesting clause important?
A vesting clause is important for several reasons:
1. Incentivizes commitment – A vesting clause incentivizes shareholders to stay with the company for the long-term. If a shareholder leaves before their shares are fully vested, they forfeit their unvested shares.
2. Aligns interests – A vesting clause aligns the interests of the shareholders with the interests of the company. Shareholders are more likely to be committed to the company`s success if they have to earn their shares over time.
3. Protects the company – A vesting clause protects the company by ensuring that shares are earned over time and are not immediately owned by shareholders. This prevents situations where a shareholder could acquire a significant ownership stake and then immediately sell their shares.
What should be included in a vesting clause?
When drafting a vesting clause, there are several key factors to consider:
1. Vesting schedule – The vesting schedule outlines when shares will be earned and how much of each shareholder`s shares will be vested at each milestone. The schedule should be reasonable and align with the company`s growth trajectory.
2. Conditions – The conditions for vesting should be clearly outlined. Common conditions include continued employment, achieving certain revenue or profit milestones, or a combination of both.
3. Acceleration – Acceleration clauses allow for vested shares to be earned more quickly if certain conditions are met, such as a change in control of the company.
4. Forfeiture – A forfeiture clause outlines what happens to unvested shares if a shareholder leaves the company before their shares are fully vested. This can include the shares being returned to the company or being distributed to other shareholders.
In conclusion, a vesting clause is an important provision in a shareholder agreement that ensures shareholders are committed to the company`s long-term success. When drafting a vesting clause, it`s important to consider the vesting schedule, conditions, acceleration, and forfeiture clauses. By including a vesting clause in your shareholder agreement, you can align the interests of shareholders with the success of the company and protect the company`s long-term interests.