Many companies use share vesting as a way to incentivise employees or shareholders to stay with them and maintain a high commitment level. This is possible due to the time frames in which they would receive the rewards for the shares. Read this article to find out how this works and if you can incorporate it into your business.
Vested and unvested shares
A vested share allows you to act on it and sell. There are no time frames to when you can do this, it is all up to you. If it is vested, it means it is yours and the company has attached your authority to it.
An unvested share allows you to act on it and sell, but only after a certain period of time. It may also require a certain even to occur before you can act on it and sell. This is particularly popular for businesses to ensure employees stay motivated to their job. It also prevents employees taking away the companies money if they quit their job, especially if they have not yet earned that benefit.
Either direction you wish to take, it can be very helpful to discuss with a financial lawyer. They can provide advice, recommendations and caution you on key points specific to your business.
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Time based vesting
As an example, let’s say Steve is about to vest some shares. Typically, this will require Steve to wait four years for the shares to vest. This four year wait usually starts one year from the time that Steve and co-founders have agreed. (This is known as a ‘cliff’).
So if a co-founder leaves before the first year is up, they will receive nothing. After that first year wait, 25% of the shares will vest. Then they will receive about 2% per month every month until it reaches 100%. Not all arrangements are necessarily monthly though.
It is also not required to have a ‘cliff’. It is possible to backdate this date to the time when you and the co-founders first started planning the idea, and this does not require the company to have been established yet.
Milestone based vesting
When we talk about only allowing owners of vested or unvested shares to reap the rewards after an event, that is known as milestone based vesting. This is the best strategy for employees in particular. You can create milestone events that they have to achieve in order to unlock that reward. Think of it like a video game where you have to progress in stages in order to complete the whole game.
This keeps them honest and committed to your business. It also ensures that you don’t loose out on any money if they decide to quite out of the blue. Loosing an experienced employee can be difficult to replace, and even more so if they are able to take with them money from the shares you provided.
This is endorsed by the Australian Government as an Employment Share Scheme.
Share vesting to mitigate risk
There are many situations that will expose your business to a variety of risks. Some foreseen, some unforeseen. As a business owner, you should do everything you can to mitigate and minimise your risk, for the benefit of your own livelihood. Share vesting could be the exact strategy you need.
Startups are usually very stressful, especially if you are a co-founder with other members. Different people with different ideas about what to do can cause disputes. If you’ve implemented the unvested shares then it means if anyone leaves within that first year, they can’t take all of the funds with them. This will either motivate founders to think of new ideas and bring more to the table, or keep you startup money safe if they still decide to leave anyway.
Conclusion
So in a nutshell share vesting can be very beneficial for employees, shareholders and your co-founders. It’s a good way to safeguard yourself in the event of an unforeseen obstacle, and also can help minimise your financial risks.
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