Vesting and Reverse Vesting

Founders and essential employees are the backbone of any enterprise, and their dedication can make or break a company`s trajectory. One of the most effective strategies to ensure these pivotal players remain invested in the company`s success is through vesting and reverse vesting clauses. These mechanisms are gaining traction in Spanish startups as powerful tools for talent retention and investment protection. 

What is Vesting? 

Vesting is a strategic method where company shares or stock options are allocated to employees incrementally over time or upon achieving specific milestones. Unlike traditional ownership, where shares are granted upfront, vesting schedules ensure that employees earn their shared through continued contribution and loyalty to the company. This not only attracts top talent by offering attractive compensation packages but also aligns employees` interests with the long-term success of the company. 

Typically, vesting schedules span up to four years, with shares gradually becoming available over this period. For example, an employee might receive 25% of their shares each year, ensuring full ownership only if they stay with the company throughout the entire vesting period. 

Can Vesting be Accelerated? 

Yes, under certain circumstances, vesting can be accelerated. Common scenarios include: 

• Achieving Exceptional Business Results: If founders deliver outstanding financial or growth results that surpass the business plan, their vesting schedule might be expedited
• Liquidity Events: During a change in control or liquidation of the company, all unvested shares may vest immediately before the event, ensuring founders and key employees are rewarded for their contributions

What is Reverse Vesting? 

Reverse Vesting is primarily used with founding partners who already hold shares in the company. Unlike regular vesting where employees earn shares over time, reverse vesting requires founders to earn back their shares by staying with the company. If a founder departs before a specified period, the company or remaining partners can repurchase the unvested shares. This mechanism ensured founders remain committed and protects the company and its investors from the risk associated with a founder`s premature departure. 

How does Reverse Vesting work in practice? 

Consider a founder who agrees to a four-year reverse vesting schedule with a one-year cliff. If the founder exits the company after two years, the company can repurchase the unvested 50% of their shares. This setup safeguards the company and other shareholders by mitigating the potential disruption caused by an early exit of a founder. 

Implementing Reverse Vesting Clauses

Implementing reverse vesting involves several key steps: 

• Determining the Percentage of Shares Affected: decide whether reverse vesting applies to all or a portion of the shares. Founders often prefer a smaller percentage, while investors might push for a larger percentage to strengthen retention. 
• Establishing a Vesting Period: set a duration that founders must stay with the company to secure their shares. This period typically ranges from two to three years, though it can vary based on investment specifics. 
• Creating a Vesting Schedule: link the vesting of shares to time and fulfillment of commitments. Shares may vest gradually, commonly on a monthly or yearly basis, over the agreed period. 

To effectively incorporate vesting and reverse vesting clauses, consult Gentile Law. Our expert attorneys specialize in customizing these clauses, ensuring proper incentives and protecting company interests. Contact us for professional assistance with these crucial mechanisms and secure your startup`s future today.